Capital punishment for even the most heinous crimes has been abolished in most western democracies with some significant exceptions such as the USA. In regard to debt however, the USA has a most benign set of laws dealing with insolvency both personal and corporate. Contrasting significantly in both of these matters is the Republic of Ireland. The death penalty has been long abolished in Ireland but the personal insolvency regime there has been described by many august authorities as unpractical, unused, excessively costly and overly penal.
In reality Ireland is not only out of sync with the USA its bankruptcy laws compare very unfavorably with most European countries and in particular with its twenty seven partner member states of the European Union. The hallmark of American law is the concept of a fresh start, debt forgiveness and encouragement of an enterprise culture. It is almost like winning a ‘badge of honour’ to have been declared bankrupt in the USA and to made bankrupt multiple times does not preclude the possibility of bouncing back and trying again. Ireland on the other hand is still mired in a mindset of punishment and deterrence for those who are deemed to have transgressed financially.
The new Fine Gael led government has the opportunity to change all of that. Its pre-election policy paper states:
Fine Gael is proposing to overhaul Irish bankruptcy laws and to establish new legal processes to deal with personal and commercial over-indebtedness to avoid the bankruptcy process in the first instance:
- A Flexible Bankruptcy System: Similar to Northern Ireland we will allow the courts to set bankruptcy terms depending on each individual’s circumstances – such as whether there was any fraud or undue recklessness, or whether it occurred simply as a function of unavoidable change in circumstances. Where a person had reckless or fraudulent dealings, a restriction order may be issued in conjunction with a longer bankruptcy period to act as a punishment and deterrent against such behaviour in the future.
- Out of Court Debt Settlement: Fine Gael will develop a system similar to Northern Ireland that offers a route for businesses who are owned money to demand payment using an officer of the courts to force a settlement and results in no implications for the debtor if payment is made.
- Individual Voluntary Debt Plans: Similar to the UK we will establish a new legally binding arrangement where an indebt individual and his or her creditors agree to have a plan drawn up by a certified insolvency professional or practitioner to restructure the individual’s outstanding debts. The arrangement, voted on by creditors at a creditors’ meeting, protects the individual from interest charges and the threat of enforcement while outstanding debts are restructured and worked out.
- Commercial Voluntary Debt Plans: Also similar to the UK and the individual voluntary debt plan we will establish a new system to help small firms struggling in the recession to restructure their debt and business with the help of professional insolvency practitioners while under the protection of the State that avoids the excessive cost of the examinership process.
It now falls to the new coalition government of Fine Gael and Labour to enact appropriate new personal insolvency legislation in Ireland in accordance with its policies. Much of the heavy lifting has already been done by the Law Reform Commission (LRC) which finalized its proposals for change to the insolvency laws when it published its final report on Personal Debt Management and Debt Enforcement in December 2010. The LRC went one step further when it incorporated as an appendix to that report a Draft Insolvency Bill 2010. A degree of credit must go to the Green Party which unfortunately lost all its seats in the general election after pushing for reform in this area but before it could enact new legislation. The financial tsunami currently engulfing Ireland may have temporarily diverted the attention of government ministers from the travails of the personally insolvent citizen but the IMF and EU have long called for reformation of the Irish insolvency laws including the bankruptcy regime.
The proposals contained in the draft bill are quite radical. They say, for example, that debtors should not be jailed for non-payment of debt even in instances where the debtor can afford to pay but refuses to do so. The proposed sanction is community service and not jail time.
This is not the only radical proposal. The draft bill provides for what is effectively debt forgiveness although the term ‘forgiveness’ is avoided like the plague. In fact in the 440 pages report the word ‘forgiveness’ appears only three times and two of those are quotations from other sources. It appears that the report adheres to the letter of the words of the now-retired Fianna Fail Minister of Justice Minister Dermot Ahern when he ruled out ‘debt forgiveness’ for ordinary people in May of this year at the publication of the LRC’s interim report.
The LRC however has shown considerable courage in ensuring that the spirit of its final report and the draft bill contain copious amounts of provisions which amount to nothing if not debt forgiveness. In particular the proposals for insolvent debtors with no income and no assets (NINA) provide for what are described as Debt Relief Orders. In effect qualifying debtors will be able to have their unsecured debts totally written off within a twelve months period so that they can start afresh. It is likely that there will be a ceiling on the total quantum of debts above which this relief would not be available for the insolvent debtor but this is not set out at this point. (In the UK the ceiling is £15,000).
The principal provision is the setting up of a Debt Settlement Arrangement (DSA) scheme where insolvent debtors would pay what they could afford for a period not exceeding five years, after which the unpaid balances of their debts would be discharged in their entirety. Under this scheme at least 60% of voting creditors as measured by the value of unsecured debts would have to approve the DSA for it to be approved and binding on all unsecured creditors, including those who chose not to vote on the proposal.
Other provisions include:
- Set up a Debt Enforcement Office (DEO) to arrange non-judicial settlement of debts
- Set up a Debt Settlement Office (DSO) as an integral part of the DEO to license and monitor insolvency practitioners, to be known as Personal Insolvency Trustees
- Institute a regulatory regime to control debt collection and debt advice bodies
While the LRC itself originally excluded detailed consideration of and recommendations for amending Irish Bankruptcy law (or formulating new law) from its scope and terms of reference, it has in fact and in spite of itself, made thirteen specific recommendations (provisions) relating to bankruptcy in an appendix to the report – on top of its clear statement recognizing the need to reform the Bankruptcy Act 1988. A footnote to that appendix makes fascinating and somewhat incredulous reading:
‘The commission has not included these provisions in the draft Personal Insolvency Bill in Appendix A as it understands that a new legislative framework to reform the Bankruptcy Act 1988 is currently (December 2010) under consideration’.
This footnote smacks of political ‘instruction’ from the former discredited Fianna Fail government as it is patently clear from the published work of the LRC that as a body it is extremely dissatisfied with the lack of (political) progress in taking steps to address the reform of bankruptcy law. Apart from anything else, the enormity of the task of reforming bankruptcy law means that it could take anything up to another five years to achieve that goal – even if the entire resources of the LRC were devoted to that task. Can the vision, energy and commitment of a new government shorten that timescale? It gives the phrase ‘the law’s delays’ a totally new and unintended interpretation – delays in formulating and enacting legislation rather than in the just execution of those laws.
It would be astounding and indeed unacceptable if Ireland’s draconian bankruptcy law, though rarely used, could remain the law of the land for another half decade or more. The IMF, ECB and the European Commission were able to descend on Dublin at short notice and in a matter of weeks agree measures to tackle the insolvency problems of the Irish banks and of the sovereign state itself. The competence, urgency and energy displayed so far by the new Fine Gael and Labour coalition government gives hope for optimism for the hard pressed insolvent Irish consumer that the penalty for debt is neither capital punishment nor a life sentence.