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Personal Insolvency

iStock_000009239974SmallThe Personal Insolvency Bill 2012

The aim of the Personal Insolvency Bill, as stated by Minister for Justice Alan Shatter when publishing the Bill last June, is to provide a “modern insolvency process in Ireland which addresses the obligations of debtors and rights of creditors in a proportionate and balanced way”.

Whilst it does represent a radical overhaul and modernisation of Ireland’s personal insolvency laws, the Bill also been met with criticism, being referred to as “over complex and convoluted”. It has also been argued that it does not go far enough to address the ongoing trend of “Bankruptcy Tourism”, whereby debtors are transferring their COMI overseas to avail of the UK’s more favourable bankruptcy laws. The truth is that it will probably be some time after its enactment that the true impact of the Bill will be known. One major development contained in the Bill is the creation of an independent Insolvency Service to oversee the legislative regime and to operate a personal insolvency system. It also proposes the appointment and regulation of ‘personal insolvency practitioners’, however the detail of the proposed regulatory arrangements is yet to be announced.

The Bill proposes three new personal insolvency procedures and variations to the existing court-based bankruptcy process. The new procedures would be largely non-judicial, but each would culminate in a judicial order. It should be noted that a range of criminal offences would apply in respect of dishonest behaviour in connection with any of the new procedures. In terms of the scope of said procedures, it should also be noted that they apply to personal insolvencies only – the Bill will have no effect on the winding up of companies, receivership or examinership.

The new procedures to be introduced are as follows:-

1. Debt Relief Notice

This procedure allows for a write off of qualifying debt up to €20,000 either by paying half of it off or following a three year supervision period.

It should be noted that it has no effect on secured debt and only applies to qualifying unsecured debt, examples being credit cards, overdrafts, unsecured loans, utility bills, rent etc. However, when the DRN ceases to have effect, the secured creditor retains the right to enforce his security. Taxes and sums due to various states bodies cannot be subject to a DRN.

The Bill sets out the eligibility criteria to avail of this process. Only a debtor with a net disposal income of €60 or less per week and with assets/savings of €400 or less can seek this option. Safeguards also prevent the use of the procedure where 25% or more of the qualifying debt has been incurred within 6 months of the application for a DRN.

Unlike the other processes envisaged, the DRN provides the proposal is put before the Insolvency Service, rather than creditors, who in turn decide to grant or reject the application. The procedure is commenced by submission of a written statement of financial affairs to an approved intermediary who advises the debtor on the effect of the scheme and alternative options. Once approved, the financial statement is submitted to the Insolvency Service and an application is made. If approved, the application is referred to the Court to issue the Debt Relief Notice. The notice remains in effect for 3 years during which time creditors cannot initate or continue proceedings against the debtor. During this time, the debtor has certain obligations, including informing the Insolvency Service of any material changes in circumstances. The debtor must notify the Service of any windfalls in excess of €500, 50% of which must be handed over to the Service. Furthermore, the debtor shall not obtain credit of more than €650 without informing that person of the DRN.

If the debtor pays 50% of the debt covered by the DRN to the service, he/she will be relieved of the balance of his/her liability

From a debtor’s point of view, the proposed scheme has its advantages, namely after the 3 year period the debt is written off. However, it has been criticised for its eligibility criteria, given that it is to apply only to debtors with net disposable income of €60 or less per week. Furthermore, if the DRN is terminated, the debtor is liable for all debts including arrears, charges and interest which may have accrued.

From the creditor’s perspective, their involvement is more limited. It is not open to them to accept or reject the proposal. However Section 38 of the Bill provides that a specified debtor or creditor may make an application before the court is they are dissatisfied with any act, omission of decision of the Insolvency Service. The may also apply to be excluded from the qualifying debt or may apply to terminate the DRN. As mentioned the process does not affect secured debt.

A person would only be entitled to avail of the debt relief notice procedure once in his/her lifetime and never in combination with or within 5 years of availing of any other insolvency procedure.

2. Debt Settlement Arrangement

The second process formulated is a Debt Settlement Arrangement, which allows for an agreed settlement of an unsecured debt over the value of €20,000. There is no financial ceiling on the level of debt which can be included. It consists of an arrangement between a debtor and one or more creditors to replay an amount of unsecured debt over a period of 5 years, which can be extended to 6 years.

The process permits the debtor to apply to an Insolvency Service for a protective certificate. Section 53 of the Bill sets out the application requirements, which involve the debtor making a detailed financial disclosure to the personal insolvency practitioner. The Bill empowers the Insolvency Service to carry out enquiries, including the power to obtain information held by banks, government departments and the Revenue Commissioners. The certificate will be in force for 70 days (extendable by a further 40 days) and will be entered on a register of protective certificates. The effect of such a certificate is that a creditor is prohibited from initiating or continuing enforcement proceedings save with the leave of the Court. The creditor does have a right to appeal the issue of the certificate.

The purpose of the certificate is to allow time for a DSA to be agreed. The scheme is operated through the personal insolvency practitioner who gathers information and prepares a proposal to be considered and voted upon at a creditor’s meeting. The personal insolvency practitioner must advise the debtor as to their options and assist in the preparation of the necessary prescribed financial statement which must be accompanied by a sworn statement. At the creditors meeting, the proposal must be approved by 65% of the creditors. Following approval, the insolvency practitioner must inform the creditors and the Insolvency Service. It is then recorded on a register of DSA. The result of the DSA is in effect that no unsecured creditor bound by it (including those who voted against it) may take action against the debtor. Section 71 of the Bill provides for determination by the court of objections lodged. The Bill sets out the duties of a debtor, such as full cooperation and to act in good faith. The arrangements may be varied or terminated at a creditor’s meeting instigated by the insolvency practitioner where there has been a material change in the debtor’s circumstances. Moreover, Section 78 provides for a termination of the arrangement on application to the Court. The section further provides situations where such application can be made including where the debtor is three months in arrears. The remedies available are at the discretion of the court. However, the scheme will deem to have failed where arrears are of 6 months or more. Again, if the scheme fails, the debtor is liable for the full debt including any arrears or interest and is deemed to have committed an act of bankruptcy.

For a creditor’s perspective, the scheme presents an attractive alternative to petitioning for bankruptcy and in some cases provides the only real prospect of recovering part of the debt. Although controversial, the 65% threshold does effectively mean that one single debt owed to a lending institution can be sufficient to veto the entire arrangement.

However, like the DRN, secured debts are excluded and thus a DSA doesn’t preclude a secured creditor (even a judgment mortgagee) from enforcing its security. Preferential debts such as tax must be paid in full.

A fundamental advantage from a debtor’s point of view is that the principal residence is protected. This is subject to the personal insolvency practitioner forming a view that the cost of continuing to reside there are not disproportionately large. However, the scheme does not allow for an appeal by the debtor and it should be noted that unlike the DRN, the debt is not written off, but written down subject only to the agreement of 65% of its creditors. Furthermore, like the Personal Insolvency Arrangement, which I will now address, the scheme requires a triple lock of approval from an Insolvency Practitioner, the Insolvency Service and the Court.

3. Personal Insolvency Arrangement

The final process to be introduced is the Personal Insolvency Arrangement. This is a process which allows a debtor to pay creditors a portion of what is due to them over a six or seven year period and then be discharged from further liability. Chapter Four of the Bill provides for a system of PIA between a debtor and one or more creditors in respect of a secured debt up to €3 million (without limit if every secured creditor agrees) and all unsecured debt. The purpose behind this arrangement is to assist those in difficulty in terms of secured debts, namely mortgages, and to provide a realistic alternative to bankruptcy. The proposal is formulated and put forward by the personal insolvency practitioner. Like the DSA, the Bill sets out detailed list of eligibility criteria. Of note is the requirement that the debtor owes a debt to at least one secured creditor holding security over an asset in Ireland. It is also interesting to note all secured debt (e.g. principal private residence mortgages etc) are treated the same. Judgement mortgages are also treated as secured debt.

As with a DSA, the initial step is obtain a protective certificate in respect of certain proceedings which is issued by the Insolvency Service and approved by the Court. The certificate shall be in force for 70 days which can be extended by a further 40. The creditor has a right to appeal. It should be noted that at the appeal, each party bears their own costs. The protective certificate does not however prevent creditors from taking action against guarantors or other co-obligators.

The Bill provides that a joint proposal may be made in circumstances where two or more debtors are jointly party to all of the debts to be covered in the PIA and each of the debtors satisfies the eligibility criteria.

Section 94 sets out mandatory requirements concerning the PIA, such as specification of debts, maximum duration and payment of the personal insolvency practitioner. In addition Section 94(2)(d) provides a debtor may not be released from certain debts in the PIA unless the relevant creditor agrees to accept the arrangement. The Bill also provides a non exhaustive list of payment options and states unless otherwise stated, the debts rank pari pasu. The bill also specifically deals with how a secured asset is treated and includes a number of safeguards for secured creditors where the arrangement provides for the disposal of the asset. Where sold, the secured creditor will obtain either the value it was sold for or the debt owed, whichever is the lesser. The Bill also addresses how the security is to be valued and in the event of a dispute provides for the appointment of an independent valuer. A PIA does not have to provide that the security be sold. It can also provide for variation of repayments. It can stipulate interest only payments or no payments at all. It can extend the period of a loan or it can defer payments for a period of time. It can also change the interest rate and mandate debt for equity swaps.

The Bill also details the procedure to be invoked when calling a creditors meeting and documentation they are to be furnished with. Section 105 sets out the necessary proportion of creditor needed to approve the scheme, i.e. 65% in total, with approval from at least 50% of the secured creditors and 50% of the unsecured creditors.

If the arrangement cannot be agreed, the debtor is left open to bankruptcy and other enforcement proceedings. This is a powerful incentive for compliance for debtors.

Once the arrangement is approved, it is forwarded to the Insolvency Service and issued by the court. The arrangement is placed on a register maintained by the Insolvency Service. Again, an objection on one of grounds set out in section 115 may be lodged. An application may also lodged to have the PIA terminated and like DSA will deem to have failed if the debtor is in arrears of 6 months or more.

Where it does become operative, it will bind the debtor and creditors and must be reviewed at least annually.

The PIA is advantageous to the debtor in that again the principal residence is protected. And indeed, once the PIA has expired, the obligations of the debtor will be discharged. However, the Bill does include a range of sanctions, both criminal and civil for dishonest behaviour by debtors regarding their financial disclosure to the Practitioner, the Insolvency Service or the Court.

4. Bankruptcy

The Bill also amends the current law relating to bankruptcy. The principle changes proposed are:

• The bankruptcy period would be reduced from 12 years to 3;
• The court could order the debtor to make payments to the creditors for up to 5 years (provided the application for such an order is made within the 3-year discharge period);
• A debt of €20,000 or less could not be pursued in bankruptcy.

It must be remembered, however, that bankruptcy would continue to apply to unsecured and secured debt of any amount over €20,000 and would be the only process available for a secured debt greater than €3 million (unless every creditor agrees to using a PIA) and certain other debts that are excluded from the new procedures (e.g. taxes).


The introduction of the non-judicial settlement options is a welcome step aimed at bringing a consensual end to the difficulties of those debtors who are eligible. A major criticism that has been levelled at the Bill is the power of a creditor to effectively veto the proposal and indeed it is clear that a creditor may well vote against a DSA or PIA. However, the effect of such a course of action would leave a debtor open to an action for bankruptcy, which will generally have them free of all debts in 3 years. In such cases, a creditor will have no guarantee of recouping its losses and therefore in practice, the power to veto may not be as powerful as it seems. Ultimately, only time will tell how successful the proposed new procedures are.