Dawn Of A New Era? The Personal Insolvency Bill 2012

Author:Mr Gavin O'Flaherty and Cormac Brown
Profession:Mason Hayes & Curran
 
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Overview

The Personal Insolvency Bill represents a significant reform and modernisation of Ireland's personal insolvency law, which has been a subject for discussion in recent times. After the recommendations of the Inter-Departmental Working Group on Mortgage Arrears (Keane) Report of October 2011 and the Law Reform Commission's December 2010 Report, which urged widescale reform, the Bill was approved by Cabinet on 26 June 2012. Needless to say, passage of the Bill was accelerated because of its inclusion as one of the requirements of our IMF programme.

The Bill, which proposes the establishment of an Insolvency Service of Ireland to oversee the new legislative regime, still grants creditors a considerable level of dominance over debtors. A "triple lock" is provided for any individual seeking the protection of a DSA or a PIA (both as defined below), meaning that an insolvency practitioner, the Insolvency Service and the court need to be satisfied that the debtor qualifies. The salient test from the creditor's perspective in the context of the DSA or the PIA (but not the DRN unusually) is that neither scheme can be unfairly prejudicial to a creditor.

Below we highlight some of the main provisions of the Bill and address some of the tax considerations that could follow the adoption of the Bill. We also give some examples of other personal insolvency regimes and give a timeline for the adoption of the Bill and the Irish personal insolvency regime.

Insolvency Service of Ireland

The Bill provides for the establishment of the Insolvency Service of Ireland ("the Service"), an entirely independent body that will participate in the delivery, monitoring and execution of the new personal insolvency arrangements provided for in the Bill and in existing legislation. The principal functions of the Service will be:

monitoring arrangements relating to personal insolvency, considering applications for Debt Relief Notices (DRNs), processing applications for protective certificates relating to Debt Settlement Agreements (DSAs) or Personal Insolvency Arrangements (PIAs), maintaining registers of DRNs, DSAs, PIAs and protective certificates, providing information to the public on the workings of the legislation and developing policy. Debt Relief Notice

This procedure applies only to debt up to €20,000. Any such unsecured debt can be written off by paying half of the debt or following a three-year supervision period. Eligible debtors:

must have qualifying debts of €20,000 or less, must have net disposable income of €60 or less per month, must have assets or savings of €400 or less and must be insolvent with no realistic prospect of being able to pay their debts within five years of the application date. Qualifying debts can include credit card debt, an overdraft or unsecured bank loan, utility bills or rent. They may include secured debt, but secured creditors retain the right to enforce their security once the DRN ceases to have effect. Only one DRN is permitted per lifetime, and a person may not enter into the DRN process within five years of completion of a DSA or PIA.

A debtor must apply for a DRN to the Service through an approved intermediary with a written statement of his or her financial affairs. The DRN remains in effect for three years, during which time creditors subject to the notice cannot take any steps to recover their debt. This prohibition applies also to notified secured creditors.

During the three-year period, the debtor must inform the Service of any material change in his or her circumstances and must hand over 50% of any gift or payment received that is worth €500 or more and 50% of any increase in income worth €250 or more (after deductions) to the Service. The Service will then distribute these funds to creditors pro rata to their debts. If the debtor pays 50% of the debt covered by the DRN to the Service, he or she will be relieved of the balance of the liability.

When the three-year period expires, the debtor is discharged from all of the unsecured debts specified in the DRN; however, secured creditors will still be able to rely on their security. The Service may apply to court to terminate a DRN if there has been dishonesty or non-compliance by a debtor. In this case, the debtor is liable in full for all debts specified in the DRN.

The DRN will have appeal only for those on the lowest rung of the debt ladder, given the asset threshold specified.

Debt Settlement Agreement

A debtor who owes over €20,000 in unsecured debt to one or more creditors will have the option of proposing a DSA. If the arrangement is accepted by creditors and adhered to over five years by the debtor, the balance of the debtor's debts covered by the arrangement will be discharged.

The concept of a Personal Insolvency Practitioner makes its first appearance in the context of a DSA, and they also take a lead role in the PIAs (dealt with below). It is unclear whether members of the accounting or legal industry (or both) will be appointed to these roles. The Minister for Justice, Defence and Equality, Alan Shatter, left the issue open in his press release and said that consultations would continue between the Department and the Central Bank.1

The debtor must make a proposal through the Personal Insolvency Practitioner, must be insolvent and must make a full financial disclosure by way of sworn statement. If the Personal Insolvency Practitioner is satisfied that the debtor qualifies, the practitioner makes an application to the Service for a protective certificate. If the Service is satisfied that the debtor qualifies, it makes an application to court for a protective certificate. If the court is satisfied that the...

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