A Personal Insolvency Arrangement is one of three new measures contained in the first draft of the Personal Insolvency Bill which was published by the Irish Government at the end of January this year. The draft bill is likely to be changed considerably before the final version which is scheduled to be ready for publication before the end of April 2012. For a start, the draft bill contains just the heads of the bill and it is clear that the government has yet to decide on many detailed aspects of the bill. Each of the three new measures being brought forward is non-judicial in nature. It is also planned to establish a new Insolvency Service which will be funded by the state and which will oversee the three new non-judicial measures, making determinations which would otherwise have to be made by the courts. The new Insolvency Service will create and maintain a Personal Insolvency Register to record the details of debtors who enter into any of the three new processes being proposed.The third of the new measures being proposed is called a Personal Insolvency Arrangement or PIA and this new process is remarkable insofar as there is really no comparable personal insolvency solution in use in the western world. In announcing the new measures albeit only in the guise of ‘heads of bill’ at this stage, the Minister for Finance Mr Noonan and the Minister for Justice Mr Shatter described the Personal Insolvency Arrangement part of the new legislation as unique and innovative and without precedent. They admitted that they were breaking new legal ground making Ireland the only country to offer its insolvent citizens a means of reaching deals with creditors on mortgage debt while also dealing with unsecured debt at the same time. It remains to be seen if the banks will play ball with its insolvent customers and really agree to write down the capital portion of mortgage debt while also agreeing to reduce mortgage repayments by a combination of interest only payments, at least for a time, and extending the term of mortgages for years. Given that the mortgage provider will generally be in an effective position to veto any Personal Insolvency Arrangement, this particular insolvency solution may have very few takers, unless the legislation provides some way of twisting the arms of creditors, at least to the extent of forcing them to agree to binding arbitration when a Personal Insolvency Arrangement is initially rejected by a narrow margin at the meeting of creditors or even where it is clear to any objective observer that it is truly the best offer that the debtor can make.
So who is likely to attempt a Personal Insolvency Arrangement? For a start, it appears to be geared to those whose insolvency is the result of their being unable to repay both their secured and unsecured debts. Secured debts would include normal domestic mortgages, loans taken out to finance the purchase of buy to let properties or debts incurred through the financing of HP Agreements or Conditional Sale Agreements for the purchase of e.g. vehicles. Unsecured debts would include overdrafts, unsecured personal loans, credit card and store card debts, utilities, rent, phone, benefit overpayments, social fund loans and guarantees.
To be eligible for a Personal Insolvency Arrangement the first hurdle that the debtor has to cross is that the total value of debts including both secured and unsecured liabilities must be more than €20,000 and be less than €3,000,000. Prior to the Personal Insolvency Arrangement measure being introduced, such a debtor could only struggle, paying as much as possible to creditors perhaps for years on end with the debt simply growing all the time or enter into bankruptcy which could last indefinitely. The Personal Insolvency Arrangement is being hailed as a genuine alternative to bankruptcy as it allows debtors to deal with almost all of their debt in a finite and relatively short period of time. Certain debts are excluded and must be addressed outside of the Personal Insolvency Arrangement. These include any liability arising out of a court order made in family law proceedings; any liability arising out of damages awarded in respect of personal injuries or wrongful death arising from the tort of the debtor; any debt or liability arising from a loan or forbearance of a loan obtained through fraud, misappropriation, embezzlement or fraudulent breach of trust; any debt or liability arising by virtue of a court order made under the Proceeds of Crime Acts 1996 and 2005 or by virtue of a fine ordered to be paid by a court in respect of a criminal offence.
The insolvent debtor must be domiciled in Ireland or must have, within the last year, carried on business in Ireland or had a home in Ireland or resided in Ireland. The debtor must have debts owed to at least one secured creditor, with security situated in Ireland. The debtor’s solvency in the next five years has to be unforeseeable, taking into account certain criteria. A Debt Settlement Arrangement must not be a viable alternative for the debtor and he or she must not be an undischarged bankrupt, or a discharged bankrupt still subject to a payment order, or be subject to a Debt Relief Certificate or a Debt Settlement Arrangement. An insolvent debtor may propose a Personal Insolvency Arrangement only once in his or her lifetime, except in exceptional circumstances. This of course puts a huge burden on the debtor and on his or her Personal Insolvency Trustee to get the initial Personal Insolvency Arrangement proposal exactly right first time since if creditors reject the Personal Insolvency Arrangement proposal at the first meeting of creditors, it will never be possible for that debtor to propose another Personal Insolvency Arrangement. The Personal Insolvency Trustee will have to be registered and licensed but the government’s proposals for these processes have yet to be divulged.
The Personal Insolvency Arrangement proposal must contain the core proposal for repayment of all or part of the debts included in the Personal Insolvency Arrangement and must be specific as to the way in which the funds are to be contributed. This method may be via a lump sum payment by the debtor or by a third party, by a transfer of assets, by an assignment of property, by a restructuring of security on secured debts, by a payment arrangement – presumably regular monthly payments from disposable income for the duration of the Personal Insolvency Arrangement or by some other such proposal that will satisfy the debts in whole or in part. The draft bill includes various provisions that protect the secured creditors and for dealing with the secured debts. These provisions include the valuation of the underlying assets, the potential sale of some or all of these assets and the restructuring of secured debts. The Personal Insolvency Arrangement proposal may seek for the principal sum due in respect of a secured asset to be reduced. Where a secured asset is to be sold any remaining residual debt may be entered into the Personal Insolvency Arrangement and treated in the same manner as the unsecured debts, unless the Personal Insolvency Arrangement proposal specifies otherwise.
The first step in the process is for the debtor to obtain a Protective Certificate from the Insolvency Service to prevent creditors from taking enforcement action in respect of the debts while the Personal Insolvency Arrangement is being prepared. This Protective Certificate lasts for between forty and sixty working days which may be extended in certain circumstances for a further ten days. The Personal Insolvency Trustee’s duties include advising creditors of the issuance of the Protective Certificate and inviting their views as to how the debts are to be dealt with; informing the debtor of the options available, investigating the debtor’s finances, preparing financial statements, devising the PIA proposal, sending the proposal to the Insolvency Service, calling the meeting of creditors and swearing out statutory declarations regarding the proposal.
For a Personal Insolvency Arrangement to come into effect, a minimum of 65% in value of all votes cast by both secured and unsecured creditors must approve the proposal at the meeting of creditors and in addition either all of the secured creditors have to accept the proposal or 75% in value of the secured creditors and 55% in value of the unsecured creditors have to accept the proposal. A copy of the approved Personal Insolvency Arrangement is sent by the Personal Insolvency Trustee to the Insolvency Service which in turn will send a copy to the Circuit Court which will, unless a creditor lodges an objection, make an order approving the Personal Insolvency Arrangement. All creditors who were entitled to vote at the meeting of creditors are then bound by the terms of the Personal Insolvency Arrangement as approved at the meeting. When the Circuit Court makes its order, the Personal Insolvency Arrangement takes effect and the clock starts running. The maximum term of the Personal Insolvency Arrangement will be seventy two months which can in exceptional circumstances be extended by a further twelve months.
Creditors have the right to object to the Personal Insolvency Arrangement by applying to the Circuit Court within thirty days of the notification to the Insolvency Service of the outcome of the meeting of creditors. Grounds for such an objection include the creditor’s interests being unfairly prejudiced. If the objection is upheld by the circuit Court the Personal Insolvency Arrangement would cease and the debtor would be open to bankruptcy proceedings. Even after approval a Personal Insolvency Arrangement may be varied or terminated at any time during its term by creditors with the same voting rules applying as applied at the original meeting of creditors that approved the Personal Insolvency Arrangement in the first place.
When a Personal Insolvency Arrangement terminates prematurely the debtor will be liable for all debts covered by the Personal Insolvency Arrangement except in certain circumstances. An application for adjudication in bankruptcy against the debtor may be made by a creditor or the debtor on the ending, termination or failure of the Personal Insolvency Arrangement.
At present the government is consulting with various interested parties and it remains to be seen how the voting rules in particular are fleshed out. The powers and rights of secured creditors in particular raise a lot of questions, given that there is no precedent in other jurisdictions for this type of personal insolvency process. The question also arises as to how Personal Insolvency Trustees will be trained, qualified, registered and licensed and what fee structure will be put in place for such personnel. Will accountants and solicitors in general be allowed to register as Personal Insolvency Trustees without any particular training, expertise or experience in insolvency? Given that there is likely to be a long legislative process in the Dail before the final Personal Insolvency Bill is enacted into law and given that resources have to be assigned to for example the establishment of the Insolvency Service and that appropriate regulations have to be put in place, it seems unlikely at this stage that the Personal Insolvency Arrangement will be up and running as a personal insolvency solution before the autumn of 2012.
Paddy Byrne 22/02/2012