The EU ECB IMF troika laid down the end of March 2012 as the deadline for the Irish government to publish its final proposals for changing personal insolvency laws. The government failed to meet that deadline and got agreement to put it off until the end of April 2012. Again the government failed to meet the extended deadline. The latest deadline is end of June 2012. What are the odds that this will yield the final draft of a Personal Insolvency Bill? The odds are not very good. The standard ‘civil-service-speak’ excuse is that it is more important to get it right than it is to get it quickly. Yes, minister. But does the government get it? The famous bank guarantee took all of one night at the end of September 2008 yet almost four years later ordinary insolvent citizens have no real legal protection from their creditors or any practical solutions for their indebtedness. The Law Reform Commission published its excellent proposals for legislative reform of this crucial issue at the end of 2010 but the dithering goes on.
What are the real reasons for delay other than government incompetence? It’s hard to tell. People suspect that the banks in particular are dragging their heels in agreeing the third strand of the government’s proposals. This is the so-called Personal Insolvency Arrangement or PIA for short. The problem for the banks is that this particular piece of legislation will require banks to write down negative equity. Yet the legislation lacks compellability. It will require 75% of secured creditors to agree to a debtor’s proposal for a PIA before it is accepted. There is no provision for arbitration when creditors reject a debtor’s genuine best efforts to deal with their insolvency via a PIA. Without the compellability of binding arbitration there is no reason why creditors would voluntarily agree to any asset write downs. At this juncture, it appears that the PIA as a solution for personal insolvency where there is negative equity in an asset looks to be dead in the water.
The government appeals to the common sense of creditors to agree such write downs when it is clear that the debtor cannot service the relevant mortgage and cannot sell the property that is in significant negative equity. But now the draft legislation is out there and it will be interesting to see if this particular strand of the new bill is pulled by the government, with creditors being their biggest cheerleaders. Politically it would be a disaster for the government, having promised mortgage holders that relief was on the way. But why on earth did the government propose this in the first place, given that there was no such recommendation in the LRT’s final report in 2010 and nothing remotely like it. In fact, there is no similar solution in any jurisdiction in the world.
The first and second strands of the proposed new Personal Insolvency Bill are relatively straightforward. The first strand is the Debt Relief Certificate (DRC) which is almost identical to the Debt Relief Order (DRO) in the UK. The DRC will cater for insolvent debtors who have no more than €20,000 of personal debt, who do not own a house, whose assets do not exceed €400 (apart from a low value car) and whose disposable income is no more than €60 per month. Debts are frozen for twelve months and if there is no significant change in the debtor’s circumstances in that time, the debts are written off in their entirety. The first draft of the legislation contained an anomaly regarding the treatment of a HP Agreement in a DRC but presumably this will be corrected before the final draft is published.
The second strand of the proposed new Personal Insolvency Bill is also straightforward. It is called a Debt Settlement Arrangement (DSA) and it is almost identical to the Individual Voluntary Arrangement (IVA) in the UK. It is intended for insolvent debtors with unsecured debts in excess of €20,000. The debtor would have to make monthly contributions from their disposable income for perhaps five years or contribute a lump sum from the realization of assets or contribute third party funds to the DSA all for the benefit of their unsecured creditors. Unsecured creditors could of course reject the debtor’s proposals and in fact it would require 65% by value of voting creditors to accept the DSA. The problem with this proposal is the lack of clarity as to how the family home would be dealt with, in the case of a debtor who solely or jointly owns such a property, whether in negative equity or not.
The draft bill also contains some proposed changes to the arcane bankruptcy laws but many insolvency experts consider these changes to be too little if not also too late. Why they should be deliberately and distinctly different to UK legislation is baffling. It is almost as if the government wishes to encourage its insolvent citizens to file for bankruptcy in other jurisdictions under the COMI regulations, as promulgated by the EU. Perhaps that is the thinking – export the problem! Surely not! And yet, why build in such blatant differences, particularly in relation to the discharge period of three years in comparison to one year in the UK and Northern Ireland? Was there no real consideration given to harmonizing the laws in our neighbouring states?
Roll on, end of June2012! Apart from the actual final text of the new bill, it remains to be seen how the government is going to structure a new insolvency service, how it proposes to licence insolvency practitioners and how it proposes to regulate the insolvency sector. If it continues to re-invent the wheel, it’s hard not to anticipate some more legislative accidents.
Paddy Byrne 16/05/2012