Re Callaghan (a debtor)

• Jurisdiction: Ireland
• Judge: Ms. Justice Baker
• Judgment Date: 22 May 2017
• Neutral Citation: [2017] IEHC 325
• Date: 22 May 2017
• Court: High Court
• Docket Number: [2016 No. 282 CA] [C:IS:ESLH:2016:000463]

[2017] IEHC 325

THE HIGH COURT ON CIRCUIT

Baker J.

[2016 No. 282 CA]

[C:IS:ESLH:2016:000463]

EASTERN CIRCUIT COUNTY OF LOUTH

IN THE MATTER OF PART 3, CHAPTER 4 OF THE PERSONAL INSOLVENCY ACTS 2012-2015

AND IN THE MATTER OF PAULA CALLAGHAN OF 246 RATHMULLEN PARK, DROGHEDA, CO. LOUTH (‘THE DEBTOR’)

AND IN THE MATTER OF AN APPLICATION PURSUANT TO SECTION 115A(9) OF THE PERSONAL INSOLVENCY ACTS 2012 – 2015

Insolvency – Personal Insolvency Acts 2002-2015 – Personal Insolvency Arrangement – Restructuring of secured loan – Warehousing of part of debt

Facts: The objecting creditor had filed an appeal against the order of the Circuit Court for the confirmation of the Personal Insolvency Arrangements (‘PIA’) of the debtors under s. 115A(9) of the Personal Insolvency Acts 2002-2015. The objecting creditor contended that the learned judge of the Circuit Court had erred in law in holding that the proposed PIA was not unfairly prejudicial to the interests of the objecting creditor. The objecting creditor further argued that the learned judge of the Circuit Court had erred in law by dismissing the alternative proposal made by it for the benefit of the debtors.

Ms. Justice Baker affirmed the order of the Circuit Court and dismissed the appeal filed by the objecting creditor. The Court found that the proposed PIA was financially viable for the debtors. The Court scrutinized the alternative proposal made by the objecting creditor in detail. The Court held that the said proposal was unfair and against the interests of the debtors. The Court noted that a mere fact that the said proposal allowed the debtors to remain in their principal private residence for lifetime would not make it reasonable. The Court held that long-term warehousing as mentioned in the said proposal was permissible but not reasonable in the circumstances of the present case as the debtors had no guaranteed source of income.

JUDGMENT of Ms. Justice Baker delivered on the 22 ^nd day of May, 2017.

1 This judgment is given in the appeal of KBC Bank Ireland plc (‘KBC’), the objecting creditor, from an order of the specialist judge of the Circuit Court, Judge Mary O'Malley Costello, by which she confirmed the Personal Insolvency Arrangement (‘PIA’) of the debtor under s. 115A(9) of the Personal Insolvency Acts 2012 – 2015 (‘the Act’) and dismissed the objection of the objecting creditor. This judgment is also given in the appeal of an identical order made by the specialist judge in the interlocking application of Colm Callaghan, Record No. 2016 283 CA.

2 The primary ground of appeal is that the specialist judge of the Circuit Court erred in law and in fact in finding that the proposed PIA was not unfairly prejudicial to the interests of the objecting creditor, and that she erroneously came to the view that the proposed PIA enabled the creditor to recover the debts due to it to the extent that the means of the debtors reasonably permitted.

3 The appeal arises from a submission made by the objecting creditor under s. 98(1) and s. 102(1) of the Act by which the objecting creditor made an alternative proposal to deal with the mortgage debt on the principal private residence of the couple. Other less central grounds of appeal will appear in the course of this judgment.

4 One matter for determination is whether the Act permits the coming into force of a PIA which would involve deferring or ‘warehousing’ the repayment of a portion of secured debt beyond the specified term of the Arrangement.

Relevant facts

5 The debtors are a married couple who reside with their three young children in a three bedroom semi-detached property in Drogheda held by them subject to a mortgage in favour of KBC, the term remaining whereof is 273 months. The secured amount was €285,647 at the date of the issue of the protective certificate on 20 ^th April, 2016. The principal private residence of the couple has a value in accordance with s. 105 of the Act of €105,000.

6 The mortgage debt fell into arrears arising from the fact that both husband and wife were out of work. Mrs. Callaghan was unable to work due to ill health and only in recent months began to receive a weekly invalidity pension. Mr. Callaghan was out of work for approximately sixteen months, but has now obtained employment. In the period when both husband and wife were not working, the mortgage fell into significant arrears and the liabilities of the couple now far exceed their joint monthly incomes.

7 Interlocking PIAs were proposed by the Personal Insolvency Practitioner (‘PIP’), Daragh Duffy, the material elements of which I now set out.

Proposed PIA

8 A six-year PIA is proposed. The estimated joint monthly income of the couple for the period of the PIA is €3,025, which after taking into account reasonable living expenses and other costs, leaves available during the currency of the PIA the sum of €474 per month to service mortgage repayments. The amount available will increase at the end of the PIA to €582 for the remainder of the mortgage term. It is proposed that for the period of the PIA the interest rate on the mortgage would be reduced to 2.5% and thereafter would revert to 4.5% for the balance of the term. The short term reduction in the interest rate is proposed in order to provide finance to deal with the unsecured liabilities and pay the fees of the PIP. The mortgage term is to be extended by six years until Mr. Callaghan is aged 70, to January, 2045. There was proposed a debt write-off, called a ‘negative equity write-off’, of €165,647 leaving a live mortgage balance of €120,000. The amount written down will rank as unsecured and will receive a dividend within the Arrangement. The provision to deal with unsecured creditors is not the focus of this appeal.

9 The statutory meeting of creditors was held on 17 ^th June, 2016, and the PIA was rejected by the majority of creditors present. The secured creditor voted against the proposal.

The section 115A application

10 Following the result of the meeting of creditors, the debtors brought an application pursuant to s. 115A(9) of the Act in the Circuit Court for an order confirming the coming into operation of the PIA notwithstanding that it had been rejected at the meeting of creditors. The statement of grounds in statutory form prepared for the purposes of the s. 115A(9) application stated that the PIA provided a better return for creditors than in bankruptcy and had the consequence that the debtors retained ownership of their principal private residence with a sustainable mortgage.

11 KBC lodged a notice of objection in which it pleaded, in reliance on the statutory provisions, that the proposed PIA would not ‘enable the creditors to recover the debts due to them to the extent that the means of the debtor reasonably permit’ (s. 115A(9)(b)(ii)), that the proposed arrangement was ‘not fair and equitable in relation to the interests of each class of creditors that has not approved the proposal and whose interests or claims would be impaired’ (s. 115A(9)(e)), and was unfairly prejudicial to its interests (s. 115A(9)(f)).

12 A number of affidavits have been filed in the application. The grounding affidavit on behalf of KBC by Garret Gately was sworn on 19 ^th August, 2016. The replying affidavits of each of the debtors were sworn on 20 ^th October, 2016. A supplemental affidavit of Garret Gately was sworn on 7 ^th November, 2016, and the affidavit of Daragh Duffy was sworn on 19 ^th October, 2016. All of this evidence was before the Circuit Court.

A counterproposal or submission by a secured creditor

13 KBC argues that it made a submission for an alternative approach to the secured debt which would have enabled the debtors to continue to reside in their principal private residence, and would have resulted in a better return for KBC in the long term. That proposal was made pursuant to the statutory power contained in s. 98 of the Act by which a PIP is obliged to invite such submissions regarding the debts concerned and the manner in which the debts might be dealt with as part of a PIA. A PIP is obliged under s. 98(1)(b) to consider any submissions made by creditors.

14 Section 98 of the Act permits a secured creditor to make a proposal or a counterproposal for the treatment of its debt. No equivalent provision is found with regard to unsecured liabilities. A PIP is required to have regard to such preferences in formulating a proposal for a PIA. The requirement is not that the PIP should incorporate such express proposals, but s.102(2)(b) mandates that a PIIP have regard to such preferences to the extent that it is reasonable to so do:

(2) In formulating the proposal for a Personal Insolvency Arrangement the personal insolvency practitioner shall—

(a) have regard to subsection (3) and sections 103 to 105, and

(b) to the extent that he or she considers it reasonable to do so, have regard to the preference of the secured creditor furnished under subsection (1) as to the treatment of the security and the secured debt.

15 A PIP therefore may not without some reason ignore such proposals entirely.

16 A submission may form the basis of an assertion by a secured creditor that the proposal in a PIA amounts to an unfair prejudice, and s. 115A(10)(b)(i) requires the court to consider any submission made by a creditor under s. 98(1) or ‘any alternative option available to the creditor for the recovery of the debt concerned’ (s.115A(10)(b)(ii)). Fairness to creditors therefore can be linked to the reasonableness of rejecting some or all of any counterproposals or submissions.

17 A PIP is required under s.102(2) to have regard to the preferred approach of a secured creditor, and s. 102(1) provides that a secured creditor who has been notified by a PIP of the issue of a protective certificate may ‘indicate a preference as to how, having regard to...