Against a backdrop of a national recession and unprecedented liquidity and solvency crises in its banking system, Ireland obtained financial support from the International Monetary Fund and the European Union. It was a condition of the provision of financial support that, among other measures, reform of the personal insolvency laws in Ireland be initiated and implemented.
It is clear that the current bankruptcy regime is inadequate for the changing demands of Irish society. In particular, there is no legislative mechanism for non-judicial debt settlement. Further, the period for which a debtor remains a bankrupt is 12 years, unless all costs and preferential claims have been paid in which case a bankrupt may apply to the High Court to be discharged from bankruptcy after 5 years.
The pressing need to create effective solutions for the management of personal debt in Ireland through non-judicial means has been complicated by the level of negative equity affecting many mortgage holders. Many secured loans contain significant amounts of unsecured debt as a result of the negative equity precipitated by falling property values in Ireland (in both the residential and commercial sectors). Therefore, assessing the viability of enforcement options and bankruptcy proceedings, as against consensual restructuring or debt settlement, has been, and undoubtedly will continue to be, a challenge for lenders seeking recovery of their debts.
The inadequacy of our personal insolvency laws is highlighted by the fact that Ireland's nearest neighbour, the United Kingdom, provides for non-judicial debt settlements (in the form of Individual Voluntary Arrangements) and a much shorter period for bankruptcy, which can, in certain circumstances, be as little as 12 months.
Personal Insolvency Bill
On 25 January 2012, the Irish Government published the heads of a new Personal Insolvency Bill for Ireland (the "Draft Bill").
The Draft Bill incorporates many of the findings and suggested strategies of earlier reports on the topic (namely the 2010 Report of the Law Reform Commission on Personal Debt Management and Debt Enforcement and the 2011 Report by the Inter-Departmental Mortgage Arrears Working Group).
Interested parties have been invited to submit commentary on and suggested amendments to the Draft Bill. It is likely that the Draft Bill, when finalised, will look considerably different, but it is worthwhile broadly outlining how Ireland proposes legislating for personal insolvency.
The next step in the legislative process is for the Draft Bill to be agreed and then published. Once it is published, it will go to the Oireachtas (the Irish national parliament) for debate and for a vote. It is our understanding that the drafting and publication of the personal insolvency legislation is being expedited and we expect the legislation to be in place before the end of 2012.
Proposals for Reform - the key changes envisaged by the Personal Insolvency Bill
The Draft Bill provides for the establishment of an independent body called the Insolvency Service, the principal functions of which would be the management of the non-judicial personal insolvency system, as provided for in the Draft Bill, and to maintain a newly-formed Personal Insolvency Register.
The Draft Bill introduces three new non-judicial debt settlement systems, which are:
Debt Relief Certificates;
With regard to the bankruptcy laws, the Draft Bill proposes the automatic discharge of a bankrupt from bankruptcy, subject to certain conditions, after 3 years.
Debt Relief Certificates
A debt relief certificate ("DRC") provides for the forgiveness of debt for debtors who satisfy certain eligibility criteria. In order to apply and be eligible for a DRC, a debtor must make an application to the Insolvency Service through an approved intermediary and have qualifying debts (as defined by the Draft Bill) of €20,001 or less.
Secured debt is not a Qualifying Debt for the purposes of a DRC and therefore will not be affected by the granting of a DRC.
Debt Settlement Arrangements
A debt settlement arrangement ("DSA") is a settlement with creditors which, provided the debtor satisfies the eligibility criteria, will result in a debtor's unsecured creditors being paid or satisfied in part or in full.
This arrangement shall not affect the rights of a secured creditor.
A DSA shall only be proposed on behalf of a debtor through a personal insolvency trustee and may only be proposed once in a 10 year period by the same debtor.
In order to apply and be eligible for a DSA, a debtor must have liabilities of €20,001 or more.
As an interim protective measure, a debtor may make an application to the Insolvency Service for a certificate to prevent enforcement in respect of any personal debt owed by him or her while proposals are with the Insolvency Service for determination.
Before a DSA is granted to a debtor, it must be approved by a majority of 65 in value of unsecured creditors at a meeting of creditors.
The maximum duration of the DSA shall be 72 months, if agreed by the creditors, and if not, then the duration shall be 60 months.
Personal Insolvency Arrangements
The purpose of a personal insolvency arrangement ("PIA") is stated to find a solution to the serious and continuing disruption to society and the economy in Ireland as a result of the widespread insolvency amongst debtors with secured debt and to provide for a realistic alternative to bankruptcy.
It is proposed that the maximum duration of the period within which the obligations of a PIA are to be performed shall be 72 months, but a PIA may provide for an extension of this period for up to a further 12 months in circumstances specified in the terms of the PIA.
A debtor shall only be eligible to benefit from a PIA provided that the eligibility criteria are met, one of which is that the debtor's liabilities are in excess of €20,001, but do not exceed €3,000,000.
A PIA can apply to and effect secured debt and secured creditors that hold security over a debtor's asset in Ireland.
A proposal for a PIA shall be formulated and proposed on behalf of the debtor by a personal insolvency trustee.
As above, a debtor who applies for a PIA may make an application to the Insolvency Service for a certificate to prevent the enforcement of any personal debt whilst proposals are being considered.
Valuation of Security
The valuation of security in respect of secured credit for the purposes of a PIA shall be determined by agreement between the debtor (acting through the personal insolvency trustee) and the relevant secured creditor. In the absence of agreement as to the value of the security, the debtor (acting through the personal insolvency trustee) and the relevant secured creditor shall, appoint an appropriate independent person to value the security and that valuation shall be used by the personal insolvency trustee for the purposes of preparing the proposal for a PIA.
It is proposed that before a PIA will become binding, it must be approved at a creditors' meeting. The Draft Bill provides that a proposed PIA will have to be approved by a majority of 75% of secured creditors and 55% of unsecured creditors.
However, the Draft Bill does not confirm whether or not all secured creditors will have equal voting rights. For example, it is unclear whether it is intended that a subordinated creditor will have equal voting rights to a creditor holding a first fixed charge?
Amendments to the Bankruptcy legislation
The Draft Bill proposes that the threshold for the issuance of a bankruptcy summons be raised and that a summons should only issue against a debtor who owes a liquidated debt which is in excess of €20,001. As it stands, a bankruptcy summons may be issued when a debtor has committed an act of bankruptcy and owes a liquidated debt of €1,800 or more.
It is envisaged that a court, in deciding whether or not be make an order for costs in respect of the bankruptcy proceedings, may have regard to whether the applicant creditor had refused to accept an appropriate settlement or arrangement, namely a DSA or PIA which has been proposed by or on behalf of the debtor.
The principal proposed amendment to the bankruptcy legislation is that every bankruptcy shall automatically terminate after three years. However, the bankruptcy official assigned to the bankrupt shall be entitled to apply to the court (on his own motion or pursuant to a request from a creditor) to object to the automatic discharge of a person from bankruptcy on the grounds that the bankrupt has acted in a manner that was dishonest, uncooperative or wrongful. In these circumstances it is proposed that the court will have jurisdiction to extend the period of bankruptcy for a maximum period of 8 years.
The Draft Bill provides that the reduced period for automatic discharge will also apply to existing bankrupts.
If the bankrupt has any unrealised property at the date of termination of the bankruptcy, it will remain vested in the bankruptcy official.
Another important proposal is that the court shall have the discretion, taking into account reasonable living expenses, to make an order requiring a discharged bankrupt to make payments from his or her income to the bankruptcy official or a creditor for a period of up to 5 years after the date of discharge of the bankruptcy.
What does the Draft Bill mean for secured creditors?
The Draft Bill has the capacity to cause a fundamental shift in the dynamic of a relationship and/or the negotiations between mortgage holders and mortgage lenders. If the terms of a proposed PIA are not acceptable to a secured creditor, the debtor may apply to have himself or herself adjudicated bankrupt, and potentially be discharged from bankruptcy after 3 years.
If the banks are required to write down secured debt, it is likely to have a detrimental effect on their balance sheets which could negatively affect the recent inroads made by the banks in attracting investment.
Interestingly, in the United Kingdom Individual Voluntary Arrangements do not permit the writing down of secured debt.
Write-downs of household mortgages, combined with the current level of mortgage defaults, could amplify banks' losses which would have ramifications for the Residential Mortgage Backed Securities ("RMBS") market in Ireland.
The writing down of mortgages could also have the effect of discouraging compliant mortgage holders, who are concerned about the level of their debt, from meeting their arrears. An increase in the level of defaults would have a detrimental effect on Irish RMBS.
Further, compulsory write downs under the PIA may make other initiatives such as processes under the Code of Conduct on Mortgage Arrears redundant, as debtors may seek to have their secured debts written down as opposed to restructured.