Varvari v The Personal Insolvency Acts 2012 to 2015

• Jurisdiction: Ireland
• Judge: Mr. Justice Denis McDonald
• Judgment Date: 27 January 2020
• Neutral Citation: [2020] IEHC 23
• Docket Number: [2019 No. 63 C.A.]
• Court: High Court
• Date: 27 January 2020

IN THE MATTER OF THE PERSONAL INSOLVENCY ACTS, 2012 TO 2015 AND IN THE MATTER OF CIPRIAN VARVARI (A DEBTOR)

[2020] IEHC 23

Denis McDonald J.

[2019 No. 63 C.A.]

THE HIGH COURT

CIRCUIT APPEAL

DUBLIN CIRCUIT

COUNTY OF DUBLIN

Costs – Personal insolvency – Due diligence – Objecting creditor seeking costs against a personal insolvency practitioner – Whether the personal insolvency practitioner carried out adequate due diligence to establish the income position of the debtor

Facts: An objecting creditor, Tanager DAC, applied to the High Court for costs against a personal insolvency practitioner in connection with an unsuccessful appeal by the practitioner from an order made by the Circuit Court on 12th February, 2019 refusing the practitioner’s application under s. 115A (9) of the Personal Insolvency Act, 2012 as amended by the Personal Insolvency (Amendment) Act 2015. The application by the objecting creditor was made on the following grounds: (a) the practitioner did not carry out adequate due diligence to establish the income position of the debtor, Mr Varvari, and did not exercise his own independent function to satisfy himself in relation to the debtor’s income such that the original application before the Circuit Court was moved on a false premise as to the extent of the household income available to sustain the proposed arrangement, the subject of the s. 115A application; (b) the practitioner determined to pursue an appeal to the High Court notwithstanding that it was apparent to him (at the latest within 13 days of filing the notice of appeal) that the earnings of the debtor and his wife fell significantly short of the household income on which the proposed arrangement had been predicated. It was submitted by the objecting creditor that, in those circumstances, the appeal was doomed to fail and, manifestly, ought not to have been pursued by the practitioner.

Held by McDonald J that the conduct of the practitioner justified an order for costs being made against him. In McDonald J’s view, the averments by the practitioner in his affidavit were misleading and gave the false impression that a careful and comprehensive process of verification had taken place. McDonald J noted that the true position was entirely different; the practitioner had not taken any sufficient steps to verify the income and had he done so, he would immediately have seen that the income actually earned by Mr Varvari and his wife fell far short of the figure used by him to justify the sustainability of the proposed arrangement. McDonald J found that the entire costs of the Circuit Court hearing and of the appeal to the High Court could have been avoided if, at the time of swearing of the affidavit in June 2018, the practitioner had sought Mr Varvari’s tax returns for 2017. McDonald J held that the tax returns plainly demonstrated that the arrangement proposed by the practitioner in this case was unsustainable; in those circumstances, the practitioner had pursued an appeal to the High Court which was bound to fail and, moreover, which he must have known was bound to fail. McDonald J held that the pursuit of the appeal was accordingly vexatious.

McDonald J held that the appropriate course to take was to make an order that the practitioner should pay to Tanager within a period of time to be fixed by the court, the sum of €6,000 together with VAT (if applicable); that sum represented two thirds of the fees (excluding VAT) that the practitioner would have earned had the arrangement been confirmed by the court. McDonald J appreciated that the sum of €6,000 represented no more than a fraction of the cost which Tanager had incurred. However, in circumstances where this was the first case in which such an order had been made (following full argument), McDonald J believed that it would be inappropriate to fix the sum at a higher level.

Costs awarded.

JUDGMENT of Mr. Justice Denis McDonald delivered on 27 January, 2020

The issue before the court

1 This judgment deals with an application by an objecting creditor, Tanager DAC ( “Tanager”), for costs against a personal insolvency practitioner in connection with an unsuccessful appeal by the practitioner from an order made by the Circuit Court on 12th February, 2019 refusing the practitioner's application under s. 115A (9) of the Personal Insolvency Act, 2012 ( “the 2012 Act”) as amended by the Personal Insolvency (Amendment) Act, 2015 ( “the 2015 Act”).

2 In summary, the application by the objecting creditor is made on the following grounds:-

(a) In the first place, it is alleged that the practitioner did not carry out adequate due diligence to establish the income position of the debtor and did not exercise his own independent function to satisfy himself in relation to the debtor's income such that the original application before the Circuit Court was moved on a false premise as to the extent of the household income available to sustain the proposed arrangement, the subject of the s. 115A application:-

(b) Secondly, it is alleged that the practitioner determined to pursue an appeal to this court notwithstanding that it was apparent to him (at the latest within 13 days of filing the notice of appeal) that the earnings of the debtor and his wife fell significantly short of the household income on which the proposed arrangement had been predicated. It is submitted by the objecting creditor that, in those circumstances, the appeal was doomed to fail and, manifestly, ought not to have been pursued by the practitioner.

Background

3 On 22nd June, 2017, a protective certificate was issued by the Circuit Court in respect of the debtor, Mr. Ciprian Varvari. The practitioner, Mr. Daniel Rule of McCambridge Duffy ( “the practitioner”) subsequently formulated proposals for a personal insolvency arrangement which were unsuccessfully put before creditors at a meeting on 29th August, 2017. Two creditors (representing 4.9% of the total debt owed by Mr. Varvari) voted in favour of the arrangement. However, the objecting creditor, Tanager, which holds security over the family home of Mr. Varvari (his principal private residence for the purposes of s. 115A) voted against the arrangement. The debt owed by Mr. Varvari to Tanager represents 95.1% of Mr. Varvari's overall indebtedness

4 As Appendix 2 to the arrangement makes clear, it was formulated on the basis that the entire household income (i.e. the income of Mr. Varvari and of his wife) amounted to €3,218.00 per month. This equates to €38,616.00 per anum. This was based on what was described as the net self-employed income of Mr. Varvari of €1,458.00 per month and the net monthly income of his wife of €1,760.00 per month. In this context, although no arrangement was proposed in respect of Mr. Varvari's wife, the practitioner, quite properly, included her income in the stream of income available to service the mortgage debt owed to Tanager. This is in accordance with s. 104 (1) and s. 104 (2) of the 2012 Act. Under s. 104 (1), a practitioner is required, in formulating a proposal for an arrangement (on terms that will not require a debtor's principal private residence to be disposed of), to have regard, inter alia, to the ability of other persons residing with the debtor to contribute to the costs of the debtor remaining in occupation of the principal private residence.

5 In proceedings under the 2012-2015 Acts, it is crucial that accurate information is provided in relation to the means of a debtor. At the very start of the process, a debtor is required to execute a Prescribed Financial Statement ( “PFS”) in which accurate information must be provided in relation to the assets, income and liabilities of the debtor. The PFS is then circulated to the creditors of the debtor so that they can make informed judgements when considering any arrangement proposed on behalf of the debtor by a personal insolvency practitioner. In this case, according to para. 15.2 of Part IV of the proposed arrangement (dealing with the “debtor-specific terms of the arrangement”) the practitioner stated that he had investigated certain statements made by Mr. Varvari and that he had “verified the information provided by examining the following documentation: … Self Employed Income …”. This statement appeared in s. 15 of Part IV of the arrangement where the practitioner set out his comments on the proposed arrangement.

6 Furthermore, in para. 15.5 the practitioner stated that, from the investigations carried out by him as outlined in para. 15.2, he could:-

“… confirm that the Debtor's true position as to assets and liabilities does not appear in any material respect to be different from those presented …”.

7 In addition, at note 1 to Appendix 2, the practitioner stated that the income of Mr. Varvari was:-

“… based on information provided by the Debtor's accountant. The Debtor is currently self-employed and is projected to earn €18,000 gross in 2017”.

8 At a much later stage in the proceedings (after I had indicated at a hearing on 20th September, 2019 that the appeal would have to be dismissed) it emerged that the information relied upon by the practitioner in support of the statements summarised in paras. 5-7 above comprised a very short letter dated 31st March, 2017 issued by Mr. Varvari's accountant in the following terms:-

“I confirm that Ciprian Varvari… . His estimated income for 2017 from self-employment will be around €18,000.”

9 The only other investigation that was carried out by the practitioner in relation to Mr. Varvari's income involved a telephone conversation which subsequently took place between an assistant to the practitioner and Mr. Varvari's accountant on 3rd April, 2017 in which it was confirmed with the accountant that the figure of €18,000 is after tax net income. The practitioner stated that Mr. Varvari had “declared his income” in the PFS. This figure of €18,000 was then used in the PFS...