On 25 January 2012 the Government approved and published the heads of the proposed Personal Insolvency Bill (the "Draft Bill"). The Draft Bill proposes the introduction of three non-judicial debt settlement arrangements and a reform of the existing bankruptcy regime. The new arrangements will allow for the write down or restructuring of both secured and unsecured debt owed by certain eligible individuals. This briefing introduces the arrangements, with a focus on the proposals relating to secured debt.
There has been general agreement that change to the existing regimes for the resolution of personal insolvency has been necessary for some time and various public groups have reported on the relevant issues.1 The Draft Bill represents the Government's proposals to implement reform in this area and is likely to be subject to considerable comment and change during the legislative process.
Insolvency Service and personal insolvency trustees
The Draft Bill proposes the establishment of an independent body to be known as the Insolvency Service that will oversee the non-judicial personal insolvency system (the "Service"). The Service will have a role in the debt settlement process and will maintain a register of the settlement arrangements. It is also proposed that personal insolvency trustees ("Trustees") and approved intermediaries will be licensed or authorised and will play a key role in advising and formulating certain of the arrangements.
The Draft Bill provides for three separate non-judicial debt settlement arrangements (the "Arrangements") designed to offer an alternative to bankruptcy. These are:
Debt Relief Certificates ("DRC"); Debt Settlement Agreements ("DSA"); and Personal Insolvency Arrangements ("PIA"). There are a number of common themes in each of the Arrangements, such as:
they are available in respect of certain debt incurred by a natural person (not a corporate) through personal consumption or in the course of his or her business, trade or profession; a debtor will only be eligible where they are insolvent (i.e. unable to pay their debts as they fall due) and meet other eligibility criteria (such as in relation to residency); the application or proposal is always made through an approved intermediary or Trustee, who will also offer advice to the debtor; a DSA and PIA will generally not affect the full repayment of "preferential debts", as defined under the current bankruptcy regime (e.g. rates, income tax, etc.); and in all cases there is a restriction on the number of times and frequency of use of the Arrangements and there may be restrictions on the availability of the Arrangements where certain other processes (such as bankruptcy) are in train or have previously been availed of. Only the PIAs affect secured debt.
Of particular note in the Draft Bill is the inclusion of PIAs (see Personal Insolvency Arrangement below). Secured debt (including residential mortgages and Buy to Let loans) can be included in these arrangements. Whilst the current drafting makes it unlikely that mortgage lenders will, in many circumstances, be compelled to accept a write down of their debt, the Draft Bill provides a formal process by which debtors can at least apply for this. The process should be robust enough to differentiate between the "can't pays" and the "won't pays", so in our view it is unlikely that there will be a flood of mortgage write downs. Having said that, in many cases this will be the only option and in those cases there are still protections for secured creditors (including a claw back).
Many parties will be interested in the Draft Bill as it proceeds through the legislative process. These include:
investors in Irish RMBS and covered bonds who will be concerned that collateral could be written down; unsecured investors and shareholders in Irish banks who may fear that large writedowns would result in bank losses in excess of current capital buffers; and potential purchasers of Irish residential mortgage books who also may fear wholesale write downs but will...