Re Callaghan (a debtor)

• Jurisdiction: Ireland
• Judge: Ms. Justice Baker
• Judgment Date: 22 May 2017
• Neutral Citation: [2017] IEHC 332
• Date: 22 May 2017
• Docket Number: [2016 No. 282 CA],[2016 No. 282 CA] [C:IS:ESLH:2016:000463]
• Court: High Court

[2017] IEHC 332

THE HIGH COURT ON CIRCUIT

EASTERN CIRCUIT COUNTY OF LOUTH

Baker

[2016 No. 282 CA]

[C:IS:ESLH:2016:000463]

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

JUDGMENT of Ms. Justice Baker delivered on the 22nd 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 20th 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 17th 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 19th August, 2016. The replying affidavits of each of the debtors were sworn on 20th October, 2016. A supplemental affidavit of Garret Gately was sworn on 7th November, 2016, and the affidavit of Daragh Duffy was sworn on 19th 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 subsection (3) and subsections 103 to 105, that creditor wishes to have the security and secured debt treated under the Personal Insolvency Arrangement”.

18 The combined effect of the statutory provisions is that a secured creditor has a right to make submissions and the PIP is mandated to consider any such submissions in formulating a PIA. That this is so arises from the nature of the secured debt as a contractual right which is afforded special protection in the legislation by reason of the existence of security. The legislation envisages different treatment for secured and unsecured debts, an approach also found in the bankruptcy legislation and in corporate insolvency.

19 The affidavit of Garret Gately says that he first made a proposal for the alternative treatment of the mortgage debt in a phone call with the PIP on 13th June, 2016, which was rejected in an email later that day. Some dispute exists between the parties as to whether KBC had made its counterproposal on time, but this did not become an issue at the hearing. For the present, I will focus on the terms of the counterproposal and the specific objection by the PIP to the means by which part of the debt was proposed to be warehoused.

The proposal to warehouse

20 The alternative proposal made by KBC to deal with the secured debt was to write off part of the mortgage debt such that it was reduced to €270,000 (a write-down of approximately €15,000) and thereafter for the split of the secured debt into two moieties of €135,000 each. It was proposed that the term of the PIA would be twelve...