Justice Minister Alan Shatter has just published the details of the Civil Law (Miscellaneous Provisions) Bill which will have the effect of reducing the term of bankruptcy in Ireland. Bankrupts under the proposed new law will ‘enjoy’ automatic release from bankruptcy after twelve years but will be legally entitled to apply for release from bankruptcy after five years.
If the matter was not so serious, the new government’s first, fumbling and feeble efforts at legislative reform of Ireland’s draconian and arcane bankruptcy laws would be laughable. The unfortunate justice minister, under whose remit this thorny subject falls, has succumbed to the temptation to earn some brownie points for the new coalition government by simply doing something – anything – in the area of personal insolvency but the move is such a timid and tiny one that all it will (deservedly) earn from the domestic and international finance community is ridicule and scorn and the announcement will simply be seen as another cute sound bite.
It is not wholly clear why the government is kicking this particular can down the road and by so doing give the clear impression that they are buying time. After all, under the terms of the EU/IMF/ECB bailout, the government is legally obliged to overhaul Ireland’s personal insolvency laws and introduce new legislation by March 2012. There is also the question of an imminent High Court challenge to Ireland’s arcane bankruptcy laws which was predicted recently by Maeve Sheehan in a recent report in The Sunday Independent. The challenge was purportedly to be made on the grounds of alleged breaches of the constitutional rights of persons facing bankruptcy. Can it be that the minister’s announcement was made simply to undermine the validity of the proposed challenge? To be fair to the new Fine Gael – Labour coalition government, it has acted on the matter of personal insolvency within four months of taking office in contrast to the inertia and inaction of the previous Fianna Fail – Greens government, who could not get their collective heads around the concept of personal debt forgiveness and who just sat on their hands for years.
Experts gave what could at best be described as a cautious welcome to the government’s announcement presumably in the context of there being a genuine hope that it is truly just the first of a great many steps waiting to be taken. The Law Reform Commission (LRC) has already carried out all the heavy lifting. The studies have been done. Experts have been consulted at home and abroad. Various foreign jurisdictions have been examined and benchmarked. The credit and insolvency sectors have given their input. The LRC published its final report Personal Debt Management and Debt Enforcement in December 2010. The LRC recommends that any new Irish insolvency legislation should emphasize the ‘fresh start’ philosophy on which much of the best European and American personal insolvency legislation is based.
The LRC has already identified the most urgent and critical reforms needed relating to the Bankruptcy Act 1988. In fact the proposed new act (currently entitled Draft Personal Insolvency Bill 2010) and the old Bankruptcy Act 1988 (needing urgent reform and amendment) are so intricately intertwined that it makes no sense to pass new laws without simultaneously (or as contemporaneously as is possible) amending the old act.
The reform of the Bankruptcy Act 1988 as proposed by the LRC is wide reaching and fundamental. It recommends setting a minimum level of debt of Euro 50,000 before a creditor can petition for the bankruptcy of an insolvent debtor. It also suggests the removal of the requirement that the insolvent debtor have available assets of at least Euro 1,920 before he or she can themselves petition for bankruptcy. The LRC wants the court to be empowered to consider the debtor’s insolvency and to stay proceedings to allow the debtor to attempt a Debt Settlement Arrangement (DSA) – as envisaged and detailed in the new draft act. It wants to see the establishment of a Pre-Action Protocol which would apply to a creditor’s petition for bankruptcy and would oblige the debtor and creditors to investigate other possible solutions such as a DSA before embarking on the bankruptcy route. The court would also be empowered to stay bankruptcy proceedings to provide time for the consideration of alternative means in the case of a debtor’s petition for bankruptcy, with similar obligations and powers as under the Pre-Action Protocol. The court would set conditions for the automatic discharge of the bankruptcy and allow for discharge before all of the bankrupt’s property had been realized. It could reduce the automatic discharge period to three years and order payments by the bankrupt for up to five years. The powers of the court would encompass discharge from bankruptcy and dealing with objections to discharge by the Official Assignee/Personal Insolvency Trustee. The requirement to pay expenses, fees etc before discharge would be removed. The definition of priority debts e.g. Revenue debts would be changed. The LRC also recommended that sanctions against dishonest and/or irresponsible bankrupts, such as restrictions and disqualifications be set. It suggested that certain assets would be exempt from the bankruptcy so as to ensure a reasonable living standard for the bankrupt. Finally it proposed that conditions be determined and set for the appointment and licensing of a new office holder entitled Personal Insolvency Trustee acting in bankruptcy, with the new licensing system overseen by a (new) Debt Settlement Office.
Not everybody embraces such far reaching reforms and there is no shortage of advice or lobbying by vested interests such as banks and financial institutions. Clearly any level of personal debt forgiveness as distinct from forbearance is bound to have a negative effect on the bottom line of banks and other creditors. Bad debts will have to be crystallized and bad debt provisions will have to be increased. So many diverse opinions have been expressed by so many commentators and lobbyists ranging from economic ‘experts’ to lawyers to accountants to bankers. They wax lyrically on issues such as moral hazard, can’t-pay versus won’t-pay, and other such red herrings while the financial pain of the insolvent citizen in Ireland goes largely unheeded. Even senior civil servants have described the proposed reform of Irish insolvency law as unfair because it is ‘very debtor friendly’!
While recognizing that many Irish people have debts that they will never realistically be able to repay, the concept of personal debt forgiveness is rejected on the spurious grounds that it is not just the banks and other big credit houses which will suffer, but also many ordinary small businesses and self employed people such as tradesmen, small builders, architects and other professionals who will be left without payment by defaulting debtors who may be ‘forgiven’.
So has the work of the LRC all been in vain and a waste of taxpayer’s money? Minister, you should grasp the nettle and urgently implement the reforms so badly needed. The time for review and consultation is over. You and your government were elected to enact new and fair laws. Don’t be a laughing stock. Be a champion for all the people including the insolvent masses who want more than forbearance – they want forgiveness and the chance of a fresh start in Ireland. Now is the time to act.