Personal Insolvency Act 2012

Author:Mr Cormac Kissane, Robert Cain, Brendan Cooney, Orla O'Connor and William Day
Profession:Arthur Cox

This Briefing contains a general summary of developments and is not a complete or definitive statement of the law. It also updates the Briefing published in July 2012 on the Personal Insolvency Bill. Specific legal advice should be obtained where appropriate. The Personal Insolvency Bill (the "Bill") completed its passage through both Houses of the Oireachtas on 19 December 2012 and was signed into law as the Personal Insolvency Act 2012 (the "Act") by the President of Ireland on 26 December 20121. The Act introduces reforms to the Bankruptcy Act 1988 (the "Bankruptcy Act") together with the following three forms of non-judicial debt settlement arrangement (the "Arrangements") which allow (subject to certain conditions being met) the write-down or restructuring of both secured and/or unsecured debt owed by certain eligible individuals: Personal Insolvency Arrangements ("PIAs") (the only Arrangement applicable to secured debt) Debt Settlement Arrangements ("DSAs") Debt Relief Notices ("DRNs") There are a number of common themes between the Arrangements as follows: each is available in respect of debt incurred by a natural person (not a corporate) whether through personal consumption or in the course of that person's business, trade or profession debtors may only avail of Arrangements where they are insolvent (i.e. unable to pay their debts as they fall due) and meet certain other eligibility criteria debtors must have no likelihood of becoming solvent within the 5 years following an application for a DSA or a PIA (3 years in the case of an application for a DRN) the application must be made through a third party (in the case of DRNs, an approved intermediary (an "Approved Intermediary") and in the case of DSAs and PIAs, a personal insolvency practitioner (an "Insolvency Practitioner")) who will also offer advice to the debtor DSAs and PIAs will generally not affect the obligation to pay "preferential debts" (such as rates and income tax) as defined in the Bankruptcy Act certain "excludable debts" (largely debts owed to the State) may also be included in an Arrangement with creditor consent creditors can object to an Arrangement but, in the case of a DRN, creditor consent is not needed a debtor may only avail of each Arrangement once a debtor cannot apply for any Arrangement where 25% or more of the relevant debts were incurred during the 6 months preceding the application a debtor has no right of appeal against a decision taken at a creditors' meeting in respect of a DSA or a PIA a debtor cannot be forced to leave a principal private residence ("PPR") under a DSA or a PIA, but may opt to do so Key Points To Note The inclusion of PIAs in the Act is particularly noteworthy as secured debt (including residential mortgages and buy-to-let mortgages) up to €3,000,000 can come within a PIA's scope. While, as drafted, it is unlikely that mortgage lenders will frequently be compelled to accept a write-down of secured debt, the Act does provide debtors with a process whereby they can apply for write-downs. The process should be sufficiently robust so as to differentiate between "can't-pays" and "won't-pays", meaning that it is unlikely that there will be a flood of secured debt write-downs, but in many cases a write-down may be the only option. It is worth noting that the Act does provide certain protections for secured creditors, including a claw-back provision. In the course of the drafting of the Act, one of the most contentious points was the extent to which secured creditors could block, or not block, PIAs or whether they could be squeezed-out if in a minority. While a majority of creditors representing not less than 65% in value of the total debt (secured and unsecured) who are attending and voting at the creditors' meeting must still vote in favour of a PIA as a prerequisite to it taking effect, only 50% in value of secured creditors attending and voting at that meeting, and 50% in value of unsecured creditors attending and voting at that meeting, must do so (a lower threshold than that contemplated when the Heads of Bill were drafted). Certain consumer advocacy groups still believe that this provides secured creditors with an effective veto (as persons with secured debt tend to concentrate their debt with one institution) but where an individual has an equal amount of secured debt with two institutions and also has unsecured debt, all of which is proposed to come within a PIA, it would still be possible for a secured creditor to be squeezed-out by the terms of the PIA being forced upon it if it is approved by the other creditors. Likewise, secured debt includes PPRs and other properties (such as buy-to-lets and commercial investments) and it is therefore possible that the creditor secured on a PPR could be out-voted by other secured creditors. The Act provides significant protections against abuse and contains a number of features to distinguish between "won't-pays" and "can't pays". Debtors must meet certain criteria and (in the case of a PIA) must have complied with any mortgage arrears process required by the Central Bank of Ireland (the "Central Bank") and operated by the relevant secured creditor for at least 6 months to be eligible to apply for an Arrangement. Each Arrangement must be approved by the "appropriate court"2and will take effect when published by the Insolvency Service on the appropriate register.3 A review by the Minister for Justice and Equality (the "Minister") (together with the Minister for Finance) of the operation of the provisions of the Act as regards Arrangements must be started within 3 years of the commencement of the part of the Act dealing with Arrangements. Further details in relation to the Insolvency Service, Approved Intermediaries and Insolvency Practitioners are set out later in this Briefing. Personal Insolvency Arrangements (PIAs) A PIA allows for the settlement of secured debt up to €3,000,000, and unsecured debt, over a 6 year period (with a possible 1 year extension) as a possible alternative to bankruptcy. The €3,000,000 cap means that secured business debt could be the subject of a PIA, as many PPR loans will have been for less than that cap amount An insolvent debtor who meets certain criteria may propose a PIA to one or more secured and unsecured creditors, which proposal must be formulated in conjunction with an Insolvency Practitioner...

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