A Proposed Alternative to Bankruptcy: The Personal Insolvency Bill

The Draft General Scheme of the Personal Insolvency Bill (“Draft Scheme”) was approved for publication by the government on 25 January 2012. It is a welcome step towards reform of the insolvency and bankruptcy laws in Ireland particularly by debtors with mortgages and debt commitments and persons facing the risk of bankruptcy which is increasing due to the current economic climate. On 7 March 2012, the Joint Committee of the Oireachtas on Justice Defence and Equality released its final report on hearings in relation to the Scheme of the Personal Insolvency Bill acknowledging that the current bankruptcy legislation is outdated.

The main objective of the Draft Scheme is “to address the serious continuing disruption to society and the economy in the State as a result of widespread insolvency amongst debtors with secured debt and to provide a realistic alternative to bankruptcy to those debtors in appropriate circumstances”. There will be changes made to the Bankruptcy Act and there will be an introduction of an extensive structure as an alternative to bankruptcy.

Major Changes

1. Bankruptcy will automatically be discharged after three years;

2. Three separate non-judicial debt settlement arrangements designed to offer an alternative to bankruptcy:

(i) Personal Insolvency Arrangement (“PIA”)

(ii) Debt Settlement Arrangement (“DSA”)

(iii) Debt Relief Certificate (“DRC”)

New Personal Insolvency Structure for Non-Judicial Debt Settlement Arrangements

The Draft Scheme provides for the establishment of an independent body, the Insolvency Service (“the Service”), which will oversee the non-judicial personal insolvency system. It is proposed that this body will have a role in the debt settlement process and will maintain a register of the settlement arrangements. There are also proposals for personal insolvency trustees and approved intermediaries which will be licensed and/or authorised. Many will welcome the lack of Court involvement which will only occur in exceptional cases. Another point to note is that secured creditors will be included in the PIAs and all three arrangements will apply to unsecured creditors.

Summary of New Settlement Arrangements

1. Personal Insolvency Arrangements

A PIA arrangement allows for the settlement of secured and unsecured debt where a debtor’s liabilities are between €20,001 and €3,000,000.

There are certain eligibility criteria contained within the Draft Scheme that an insolvent debtor must satisfy in order to propose a PIA with one or more of his or her creditors in respect of payment and/or satisfaction of his or her debts over a period of time. Amongst the eligibility criteria is the requirement that it must be unforeseeable that over the course of a five year period the debtor will become solvent. Other requirements include that the debtor owes at least one secured creditor holding security over an asset or property situated in Ireland and a DSA would not be a viable alternative to make the debtor solvent within a period of five years.

The debtor may apply to the Service for a protective certificate that will usually last for forty to sixty working days to prevent the enforcement of any personal debt while proposals are being made to formulate a PIA. The application to the Service must provide for an appointment of a Personal Insolvency Trustee (“Trustee”) who must gather financial information from the debtor and formulate a proposal. The Trustee will carry out the main duties in the process which include notifying creditors and assessing their submissions, and holding meetings with the creditors where full disclosure of the debtor’s financial affairs is required.

The Draft Scheme proposes for a maximum period of six years for PIAs during which the obligations of the debtor are to be performed. Generally, PIAs are not permitted to require a debtor to cease to occupy or dispose of an interest in his or her principal private residence however this would not apply with the debtor’s consent or where the costs to the debtor of remaining in possession are disproportionately large but legal advice must be sought.

There is also provision for a range of repayment options in a PIA which include a lump sum payment, a payment arrangement or a transfer of assets to the Trustee or creditor. There are also specific provisions in respect of secured debts and secured property. Secured creditors will also benefit from certain protections so that a minimum amount is payable to the secured creditor.

The value of the security is to be determined by agreement between the debtor, acting through the Trustee, and the relevant secured creditor. Where there is no agreement, an independent person will determine the value.

Where a proposed PIA is approved at a creditor’s meeting by a majority of 65% in value of actual votes cast at the meeting of creditors as whole, the PIA will be binding on every creditor who was entitled to vote at the creditors’ meeting. The Draft Scheme provides that the approval shall be subject to the agreement of all secured creditors or a majority of 75% in actual votes cast at the meeting of the secured creditors and a majority of 55% in actual votes cast at the meeting of unsecured creditors.

The Circuit Court will make an order approving the PIA, provided there is no objection from a creditor within 30 days, and the PIA will be placed in the register of the Service. Once effective, the creditor’s ability to petition for the debtor’s bankruptcy for a debt or enforce or recover a debt covered by the PIA is restricted.

If an objection is made by a creditor, the Circuit Court shall hear such objection in accordance with the Circuit Court’s functions set out under the Draft Scheme which include adhering to the grounds of challenge available to a creditor under Head 105 of the Draft Scheme. These grounds include a failure to follow procedural requirements, a material inaccuracy or omission exists within the debtor’s statement of affairs which causes a material detriment to the creditor or the PIA unfairly prejudices the interests of a creditor. Where the Circuit Court upholds the objection to the PIA, the PIA procedure shall be deemed to have come to an end and the protective certificate shall cease to have effect. Where the objection is rejected, the Circuit Court shall make an order approving the PIA and it will have effect from the making of that order.

In addition, a creditor, who was entitled to receive but was not given notice of the creditors’ meeting, may enter an objection to the PIA within 30 days of becoming aware that the meeting had taken place. The creditor may apply to the Court for adjudication in bankruptcy against the debtor on the grounds of a failed PIA (Head 108), the Circuit Court may revoke an earlier order approving the PIA and give supplemental directions as it thinks fit or give a direction to the Trustee for the summonsing of a creditors’ meeting to reconsider the debtor’s original proposal for a PIA or consider any proposed variation thereto.

Where the PIA has expired and the debtor has complied with his or her obligations then the debtor will be discharged from the remainder of the unsecured debts covered by the PIA and the remainder of secured debts to the extent provided for under the terms of the PIA.

2. Debt Settlement Arrangement

A DSA allows for settlement of unsecured debt only where a debtor’s liabilities are €20,001 and over. It may be proposed by a debtor to two or more creditors in respect of the payment or satisfaction of his or her unsecured debts. It may only be proposed by a debtor who is insolvent and who meets certain eligibility criteria.

Similar to the PIA, the debtor may apply to the Service for a protective certificate that will usually last for thirty or forty working days and the application to the Service must provide for an appointment of a Trustee.

The approval process for a PIA also applies to a DSA requiring a majority of 65% in value of actual votes cast at the meeting of creditors as a whole and the DSA will be binding on every creditor who was entitled to vote at the creditors’ meeting. The DSA will be deemed to have effect within 30 days of notice to the Service and the Circuit Court, subject to any objection entered by a creditor, and a creditor will be restricted from instituting bankruptcy or debt proceedings against the debtor.

A DSA may include certain repayment options which will result in creditors being paid or satisfied in part or in full over the period of the DSA. The Draft Scheme proposes that the maximum duration of a DSA is to be five years but with the express agreement of the creditors it can be increased to six years. Once the obligations in the DSA are fulfilled by the debtor, the debtor will be discharged from the remainder of the debts covered by the DSA.

3. Debt Relief Certificate

A DRC allows full write-off of qualifying unsecured debt up to €20,000 following a one year moratorium. It has no effect on secured debt.

The procedure is designed for those debtors with little or no ability to pay off their debts. The specific eligibility criteria for a DRC in addition to being insolvent include that the debtor having a net disposable income of less than €60 per month after certain expenses are deducted and assets or savings worth €400 or less. A DRC can only be made in respect of qualifying unsecured debt which includes debts related to credit cards, overdrafts, unsecured loans, utilities and guarantees.

The DRC is proposed by the debtor to the Service, through an approved intermediary, rather than to creditors, which is in contrast to the DSAs and PIAs.

The Service may grant or refuse the application on certain grounds. The DRC is entered into the register and a moratorium of one year takes effect unless it is terminated or extended. Creditors are restricted from petitioning in respect of the relevant debt or commencing any action or other legal proceedings against the debt.

If the debtor is still unable to pay at the end of the conclusion of the moratorium, then the debtor is discharged from all the qualifying debts specified in the DRC.

Report of the Joint Committee on Justice, Defence and Equality on Hearings in relation to the Draft Scheme – February 2012

On 26 January 2012, the Draft Scheme was referred to the Committee by the Minister for Justice and Equality (“the Minister”). The Committee was invited to consider the Draft Scheme and respond to the Minister by 1 March 2012. Thereafter, the Committee invited written submissions from stakeholders on the Draft Scheme and in total ten submissions were received. A public hearing followed on 15 February 2012 to discuss issues of concern raised within the submissions furnished by the stakeholders.

Having considered the submissions and the issues discussed at the public hearing, the Committee provided a report to the Minister outlining its recommendations on the Draft Scheme. Amongst the recommendations are the following:

1. The Committee was strongly of the view that the family home should be protected in any insolvency arrangement in that it should be dealt with separately to other properties;

2. The Committee noted the lack of detail within the Draft Scheme on the regulation, salary and qualifications of Trustees and further noted that MABS currently provides services similar to those envisaged by the establishment of Trustees. It recommended that MABS, if properly resourced, could take on this primary role which would avoid any potential delays to clients in need of advice. It also recommended the regulation of former mortgage brokers who may wish to act as Trustees;

3. The Committee agreed that there should be a right of appeal to a creditor’s refusal of an agreement and the Service was suggested as the appeals body. The Committee also recommended the examination of the possibility of empowering the Credit Review Office to take on such role;

3. The Committee agreed that there should be a right of appeal to a creditor’s refusal of an agreement and the Service was suggested as the appeals body. The Committee also recommended the examination of the possibility of empowering the Credit Review Office to take on such role;

4. The Committee agreed that secured and unsecured debt should not be segregated and both should be taken into account when framing the arrangements;

5. The Committee noted that the minimum protected income that any debtor should be allowed to retain, free from creditor distribution, was not defined clearly;

6. The Committee agreed with the initial bankruptcy period of 3 years but considered the proposed additional period of a potential further five years for an income attachment order (amounting to a de facto eight year bankruptcy) to be harsh. The Committee highlighted the lack of criteria for granting or refusing an income attachment order. It recommended criteria for such orders and a reduction in the maximum period during which the orders should apply to 2 years giving an overall effective period of 5 years rather than 8 years. The Committee advised that an income attachment order should not be a disincentive to people seeking to re-establish themselves;

7. The Committee recommended that the issue around bankruptcy tourism should be examined by the Department after being advised of the risks of bankruptcy tourism particularly to the UK and the ease with which a debtor can move across the border and apply for bankruptcy;

8. The Committee noted the risk of a two tier insolvency system emerging which would involve creditors, like the banks, being more likely to agree plans proposed in the higher end cases whereas applicants with little to offer may find his or her application blocked. Accordingly, the Committee highlighted the necessity for an appeals system which would allow for a challenge to refusals by creditors to agree to debt settlements under the Bill;

9. The Committee favoured the use of the Circuit Court for jurisdiction on insolvency proceedings and recommended that the Court take into account confidentiality concerns when dealing with the family home;

10. The Committee believed that the 10 year evaluation deadline for the operation of the Bill is too long and recommended that there be ongoing monitoring with reviews every 3 years. It recommended that a report be prepared by the Minister on the operation of the Bill and submitted to the Committee every 3 years.

In particular, the Committee highlighted the need for the Oireachtas to also examine bankruptcy tourism which has risen in the past few years particularly to the UK. The UK bankruptcy laws are particularly lenient in comparison to Ireland and other EU jurisdictions given that a debtor can be free from his debts within one year. Many debtors have been paying service providers to provide a client history in the UK which allows for them to file for bankruptcy in UK therefore avoiding the Irish bankruptcy laws. The Minister for Justice has confirmed that he will continue the reform of the Bankruptcy Act 1988 and hopefully this reform together with the Draft Scheme will provide an effective alternative to bankruptcy and reduce the number of persons taking part in bankruptcy tourism.

The next stage is for the Draft Scheme to progress through the government houses and once approved it will thereafter be published as an official Bill. The Minister for Justice has confirmed that the finalisation of the Bill will be arranged on a priority basis, so that it can be published in full by end of April 2012 in line with the revised commitment in the EU/IMF Programme of Financial Support.

Joseph O’Malley
Hayes Solicitors