On 22 May 2017, the High Court delivered judgment in favour of two homeowners, Paula and Colm Callaghan, allowing a significant write-down of their mortgage debt and rejecting a proposal by their lender, KBC, that the debt should instead be deferred or 'warehoused' for future enforcement.
The Callaghans had a mortgage with KBC for over 285,000 for their family home which was valued at just 105,000. The mortgage fell into arrears and the Callaghans sought to enter into a personal insolvency arrangement (PIA).
The PIA proposed by the personal insolvency practitioner (PIP) involved a reduction of the applicable interest rate, an extension of the mortgage term and a write-off of over 165,000 of the borrowers' debt. KBC proposed an alternative PIA involving a write off of a smaller amount (15,000) of the debt and splitting the balance into two equal parts (of 135,000 each). One part would remain active and subject to repayments and the other part would be treated as inactive and placed in a 'warehouse' account carrying 0% interest. This proposal also gave the borrowers the right to continue to occupy the home for the rest of their lives but subject to the warehoused amount ultimately being enforceable by KBC. The Circuit Court confirmed the PIA proposed by the PIP and rejected KBC's proposal. KBC appealed this decision to the High Court.
The criteria to be applied by a Court in reviewing a PIA include that there is a reasonable prospect that the PIA will:
Enable a debtor to resolve his / her indebtedness without recourse to bankruptcy, Enable creditors to recover the debts due to the extent the means of the debtor reasonably permit, and Enable the debtor: Not to dispose of an interest in, or Not to cease to occupy all or a part of his or her principal private residence. Baker J. observed that the test "constrains a court by considerations of reasonableness." Where a PIA is found to be reasonable, Baker J. held that the Court should not unduly interfere even if another equally reasonable PIA could be formulated. The factors relevant to whether a proposal is reasonable are the means of the debtor, the likely return to the creditor, the likely return on bankruptcy as an alternative and the reasonableness of the PIA taken as a whole in light of the objective of the statutory scheme that a debtor should be facilitated to return to solvency.
In this case, applying the criteria, Baker J. held the PIA proposed by the...