Re Hayes, a debtor

• Jurisdiction: Ireland
• Judge: Ms. Justice Baker
• Judgment Date: 01 November 2017
• Neutral Citation: [2017] IEHC 657
• Date: 01 November 2017
• Court: High Court
• Docket Number: [2017 No. 38 CA] [C: IS: SEWD: 2016:000872]

[2017] IEHC 657

THE HIGH COURT ON CIRCUIT

Baker J.

[2017 No. 38 CA]

[C: IS: SEWD: 2016:000872]

SOUTH EASTERN CIRCUIT COUNTY OF WATERFORD

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

AND IN THE MATTER OF JACQUELINE HAYES OF 6 THE CRESCENT, KILL SAINT LAWRENCE, AIRPORT ROAD, WATERFORD ('THE DEBTOR')

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

Insolvency – S.115A (9) of the Personal Insolvency Acts 2012-2015 – Mortgage loans – Sustainability of interlocking Personal Insolvency Arrangements (PIAs) – Extension of mortgage term – Calculation or fixing of interest rate – Unfair prejudice

Facts: The debtors/applicants had appealed the decision of the Circuit Court, which upheld the objection of the objecting creditor regarding the rejection of the interlocking PIAs. The debtors contended that the returns to creditor from the proposed PIAs would be greater than the likely return from bankruptcy. The objecting creditor objected to the proposed arrangements as it contended that the interlocking debtors would be unable to make repayments on the restructured mortgage. Thus, the objecting creditor claimed that the PIAs were unsustainable. The key issue arose as to the validity of the extension of the mortgage terms and legality of the fixing of interest rates. The objecting creditor argued that the proposed arrangement was unfairly prejudicial to its interests.

Ms. Justice Baker allowed the appeal of the applicant. The Court held that the proposed fixed interest rate of mortgage payments was capable for preserving the principal private residence of the debtors. The Court held that the proposal would secure the occupation and ownership by the debtors of their home. The Court noted that a proposed PIA would not be unfairly prejudicial if it was likely to provide slightly better returns on bankruptcy to the creditors. The Court further held that the concept of fairness should have been determined after taking into account the means of the debtor and the financial status of the objecting creditor.

JUDGMENT of Ms. Justice Baker delivered on the 1st day of November, 2017.

1 This judgment is given in the appeal of a determination of the Circuit Court of 6th February, 2017 and in the appeal of the spouse of the applicant, James Hayes [2017 No. 39 CA], an interlocking debtor.

2 Mitchell O'Brien, the personal insolvency practitioner ('PIP'), formulated interlocking Personal Insolvency Arrangements ('PIAs') on behalf of the debtors which were rejected by their respective creditors at a statutory meeting on 5th August, 2016.

3 Application was then made to the Circuit Court under s. 115A(9) of the Personal Insolvency Acts 2012 – 2015 ('the Act') that the court would confirm the coming into operation of the interlocking PIAs notwithstanding their rejection at the meeting of creditors.

4 By order of Her Honour Judge Enright, Judge of the Circuit Court, made on 6th February, 2017, the objection of Shoreline Residential DAC ('Shoreline'), the objecting creditor was upheld.

5 The debtors have appealed that decision.

6 Shoreline holds security on the principal private residence of the debtors having purchased a portfolio of mortgage loans from Irish Bank Resolution Corporation Limited from the special liquidators. Shoreline is an investment fund and is not a regulated entity, but has appointed a regulated entity, Pepper Asset Servicing, to undertake credit servicing. Shoreline objects to the PIA on the grounds that the Arrangement is unsustainable, would not return the debtors to solvency and is unfairly prejudicial to its interests as it proposes an extension of credit to the debtors on terms it argues depart radically from those generally available to borrowers from lenders in the Irish market.

7 Two primary matters arise for consideration in this judgment, the proposed extension of the mortgage term, from the current remaining term of eighteen years and two months, to twenty-seven years, when Mr. Hayes will be 79 and is likely to have retired from his employment, and the proposal to fix interest for the entire of the term at a rate of 3.65%.

8 The debtors argue that the return to creditors from the proposed PIAs is greater than the likely return on bankruptcy, that the maximum means of the debtors have been brought to bear on the repayment of debt, and that there is no unfair prejudice to Shoreline arising from the proposals.

Income and liabilities

9 The market value of the principal private residence of the debtors is €190,000, determined in accordance with the provisions of s. 105 of the Act, and the amount owed on foot of the secured loan is €323,626.21. The remaining term on the mortgage on the principal private residence is 218 months (eighteen years and two months). The principal private residence is a modest family home and no argument is made that it is not suitable for the needs of the couple and their children. The debtors have dependent children aged respectively eight and eleven years.

10 Jacqueline Hayes is employed full time in a permanent position and her monthly income after tax is €1,488. James Hayes in employed part-time and his monthly income, supplemented with social welfare payments, is €1,625.

11 The joint income of the couple is €3,112.65 per month and the set costs taking into account the Reasonable Living Expenses ('RLE') Guidelines (July, 2016 ed.) issued by the Insolvency Service of Ireland ('ISI') are €1,835.74 per month. The PIA provides for a mortgage repayment of €1,080.58 per month. The mortgage protection insurance is to continue at €106.48 per month. The monthly outgoings of €3,022.80 per month leave therefore a surplus of €89.85 per month. The PIP asserts that the mortgage payment of €1,080.58 is sustainable on the current income of the debtors.

12 The PIP has presented the interlocking PIAs by pooling the income of the couple and presenting the figures in the PIA as notional figures to reflect this. There is no requirement in the legislation that mandates this approach by the PIP, but having regard to the fact that a PIP has a margin of appreciation in the way in which he presents the financial information, and in the way in which the income and outgoings are structured in a proposed PIA, I am satisfied that the total available income is correctly stated at €3,112.65 (at p. 40 of the PIA) and that the means by which the payments are to be met on the restructuring are adequately reflected in the income and expenses schedule (at p. 39 of the PIA). The PIA was structured to take account of the fact that Mr. Hayes has a greater proportion of the debt and the repayment provision is accordingly presented at a ratio of 52:48, with the smaller proportion being allocated to Mrs. Hayes.

13 The total unsecured debt is €33,529.66, and the class of unsecured creditors voted in favour of the proposals.

The proposed PIA

14 The proposed PIAs deal with the secured and unsecured debt and provide for a small dividend payment to the unsecured creditors.

15 There are two secured creditors, Shoreline, with a debt of €323, 626.21 and First Citizen which holds a judgment mortgage in the amount of €14,071.36 against the debtors' interest in their principal residence. The PIA proposes the write-down of the Shoreline mortgage balance to €190,000, the current value of the principal private residence. The PIA proposes that the First Citizen secured debt will rank as unsecured debt and that First Citizen will release its judgment mortgage on successful completion of the PIA.

16 The PIA proposes to extend the term of the mortgage to 27 years from the coming into effect of the PIA, or 21 years from its completion. It is proposed that during the currency of the PIA interest only payments would be made on the mortgage and thereafter the interest rate would remain fixed at 3.65% over the remaining term of the mortgage.

Are the interlocking PIAs sustainable?

17 Section 115A(9)(b)(i) provides that a court may confirm a PIA under the section only where it is satisfied that there is a reasonable prospect that confirmation of the PIA will enable a debtor to resolve his or her indebtedness without recourse to bankruptcy. This is a statutory formulation requiring that the court be satisfied that a proposed Arrangement is capable of being maintained by the debtor, and finds an echo in s. 115A(9)(c), that the court be satisfied that a debtor is reasonably likely to be able to comply with the terms of a proposed Arrangement.

18 The objecting creditor argues that the proposed arrangements are unsustainable in a number of respects. It is argued that the debtors do not have the income to meet the capital and interest repayments on the restructured mortgage after the expiration of the 72-month period of the PIA. Second, the proposal to extend the mortgage terms to 27 years will require mortgage payments to continue until Mr. Hayes is 79 years of age, and his wife is 68 years of age. In those circumstances, it is argued that the information now available points to the unavoidable conclusion that the arrangements are unsustainable.

19 The PIP in formulating a PIA is given what I described as a 'margin of appreciation' in Re Callaghan (a debtor) [2017] IEHC 325 at para. 59. However, notwithstanding that a PIA may be formulated in many ways, and that a PIP may take a different approach to broadly similar financial circumstances, a proposed PIA must be shown to be reasonably sustainable during its currency. The language used in the Act is that it be shown that the debtor is 'reasonably likely' to meet the terms of the PIA: s115A(9)(c).

20 While the legislation requires that the court be satisfied that the PIA is reasonably likely to be performed, I do not consider that it was envisaged that a PIA would merely act to suspend an...