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Monday, 4 June 2012

The Personal Insolvency Bill

The Personal Insolvency Bill which is due to be enacted in the coming months is likely to bring about a significant change in relation to how personal debt liabilities are dealt with over the next 5-10 years.

The recent publication of the draft general scheme of the Insolvency Bill follows on from a Law Reform Commission report in 2010 and the publication of the Keane report some time later.  Indeed it is interesting to note that when the Keane report was published it was greeted with general disappointment as not going far enough to deal with the issues regarding personal insolvency.  By contrast the publication of the general scheme (which is primarily based on the recommendations of the Keane report), has been greeted with the general approval with some exceptions.
 This is a measure of how attitudes of both the Banks and borrowers in distress have moved considerably over the last 18 months.  There is a general acceptance that there is no silver bullet to resolve the huge mountain of personal debt that exists within our economy.  There is a realisation that there has to be a medium to long term view taken in relation to the debt so as to allow people to have some form of certainty and to move on with their lives.  In some cases this will allow people to restructure their debt.  In other cases it will mean that the inevitable conclusion will mean bankruptcy.  For the Banks it will allow them to negotiate deals and put them in a position where they can at least take account of a case of restructuring or renegotiating in the context of their balance sheet.

It is interesting to look at one of the objectives of the general scheme which is stated as being “to address the serious continuing destruction to society and the economy and the State as a result of wide spread insolvency among debtors with the secured debt and to provide for a realistic alternative for debtors in appropriate circumstances.”

The Scheme attempts to address these objectives by two main mechanisms;

  1. Radical changes to the existing Bankruptcy Act.
  2. Introduction of a comprehensive three pronged mechanism of restructuring debt as an alternative to bankruptcy.

The Bankruptcy Act

Existing legislation is to be amended to allow for the current twelve year period to be reduced to three years.  There is however an option that the three year period can be extended to eight years for non compliance of fraudulent or dishonest behaviour by the debtor.  Alternatively ,a Court can make a further provision on the discharge of a bankrupt for payments to creditors for up to a further five years.

New Restructuring Models

The Scheme provides for three new components of a personal insolvency structure;

  1. A debt relief certificate (DRC)
  2. Debt settlement arrangement (DSA)
  3. Personal Insolvency Arrangement (PIA)

The main features of these three components are as follows;

  1. DRC

·        Limited to debts of €20,000.00.
·        Debtor must have virtually no assets (less than €400.00) and virtually no income (max disposable income of €60.00).
·        Applies to unsecured debts only.
·        Debts can be written off by Insolvency Agency (to be established under the Act) after 1 year.
·        Creditors have no power of veto.

  1. DSA

      Applies to unsecured debts in excess of €20,000.00.
      Proposals must be implemented within 5 years (may be extended to 6 years).
      Only one DSA allowed every 10 years.
      Requires agreement of 65% of creditors by value.
      If agreed amounts under the DSA under 5/6 years the balance of the debts are written off.

  1. PIA

  • Applies to secured and/or unsecured debt in excess of €20,000.00.
  • Debtor must be insolvent.
  • It must be unforeseeable that the debtor would become solvent within 5 years.
  • Limited to €3,000,000.00.
  • One PIA in lifetime.
  • PIA to be proposed by Insolvency Trustee.
  • Standard financial statement must be prepared by debtor.
  • Debtor must act in good faith at all times.
  • Protective certificate to last for 40-60 working days – during this time Banks cannot take action against debtor.

The key feature of both debt settlement arrangements and personal insolvency arrangements will be the role of the Insolvency Trustee.

In the UK this role was confined to accountants and solicitors.  There is some indication from an Oireachtas Committee that suitably qualified mortgage brokers will be involved.  Undoubtedly experience and qualifications will be a big factor.

What will the role of the Insolvency Trustee involve?

  • Meeting with the debtor and obtaining all relevant information.
  • Assisting in the preparation of standard financial statement.
  • Contacting the creditors and seeking submissions.
  • Assessing submissions and preparing a workable proposal for the working out of the debt.
  • Holding a creditors meeting.
  • Negotiating with creditors and trying to seek agreement.
  • Holding creditors meeting in the event of a successful debt settlement arrangement/personal insolvency arrangement.
  • Ensuring that the DSA/PIA is implemented.
  • Maintaining regular contact with the debtor, creditors and the Insolvency Service.
  • Implementing any variation if necessary.
  • Maintaining ongoing accounts relating the PIA/DSA.
  • Notifying creditors in the event of any material inaccuracies that come to their attention.
  • Arranging for creditors to be paid in accordance with the restructuring agreements.
  • Wrapping up the DSA/PIA on the conclusion of all payments.

What Constitutes Approval?

The Scheme provides for an approval rating of 65% of creditors in both a PIA and DSA.  However because a PIA involves secured creditors (which do not come within the ambit of a DSA) there must be at least 65% of secured creditors in value who approve and 55% of unsecured creditors.  In this way it is clear that secured creditors in a PIA will hold the key.  This however may not give the Banks in a secured lending position the control that many people may envisage. The Banks, in any negotiations, will only be too aware that if a personal insolvency arrangement cannot be concluded that the ultimate conclusion may well be the bankruptcy of the debtor which may not suit the lender. 

The Termination of a PIA

A Personal Insolvency Arrangement can be terminated for a number of reasons which include the following;

a)      Material inaccuracies in financial information.
b)      Non compliance of the debtor i.e. if there is a default in three months of payments then application can be made to Court to have the arrangement terminated.  If there are six months of default in payments then the arrangement is automatically deemed to fail.  In this event a creditor can apply to make the debtor bankrupt at which point the debtor will become liable for all the debts and the insolvency arrangement will have terminated.

     Some of the issues that arise from the publication of the Scheme can be summarised as follows;

·        The Banks will clearly have the ultimate veto in relation to any personal insolvency arrangement and presumably in relation to a debt settlement arrangement.  However if this is abused by the Banks there may be more bankruptcies which may not suit the Banks. 
·        The insolvency trustees will have a crucial role in managing the expectations of the debtor and the creditors.  It is likely that unsecured creditors will come out badly in any such arrangement particularly where a vote is not needed for successful conclusion.
·        The scheme seeks to ring fence the family home.  The probability is however that the Banks will seek to apply pressure in circumstances where they feel that the debtor does not have to stay in for instance a large “trophy” family home.
·        The scheme allows for debts which are incurred in the pursuance of a trade or profession to be factored into a PIA.  It is not clear if this will include guarantees given in this regard.
·        The scheme does not deal with negative equity mortgages and it has preferred the Keane approach and focused on affordability.
·        It is quite possible that unsecured loans will be harder to get given the fact that people will be able to seek a debt relief certificate for unsecured debts for up to €20,000.00.
·        There is limit of €3,000,000.00 on personal insolvency arrangements.  There is a view that this limit is simply too low to take account of the extent of unsecured debt. 
·        The scheme allows for a debtor to have “a reasonable standard of living”.  This is not defined and presumably will be assessed on a case by case basis.
·        The Banks argue that the implications of debt settlement arrangements and personal insolvency arrangements will naturally be that it will increase the cost of obtaining mortgages for new borrowers. 

What is certainly clear is that the new Act when eventually enacted will create an opportunity for lenders and distressed borrowers to seek some certainty in relation to their respective positions and bring about an orderly resolution to the discharge of the mountain of personal debt which exists within our economy.  It is regrettable that it has taken over two years for many of the proposals of the Law Reform Commissions and laterally the Keane report to become law.  It is likely that in 5-10 years time the new Act (assumed that it is published in similar terms to the general scheme) will have made a significant contribution to the significant personal insolvency issues currently existing.

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