The Personal Insolvency Act 2012: A solution to our personal debt crisis?

January-25-2013 in Insolvency & Restructuring

On 24 January 2012, the draft general Scheme of the long awaited and greatly discussed Personal Insolvency Bill was published for consultation by the Government. Following a process for submissions, the Personal Insolvency Bill 2012 was published on 26 June 2012 and presented for the First Stage before Dáil Éireann. The Bill passed all stages of Oireachtas on 22 December 2012 and reached enactment on 26 December 2012. It now awaits commencement. This article examines the main provisions in this long awaited piece of legislation and highlights some of the main practical issues arising.

Main Provisions of the Act

The Act introduces three separate non-judicial debt settlement arrangements, subject to relevant conditions in each case, designed to offer an alternative to bankruptcy:

1. Debt Relief Notices (“DRN”)
2. Debt Settlement Arrangement (“DSA”)
3. Personal Insolvency Arrangement (“PIA”)

The Act provides for the establishment of an independent body, the Insolvency Service of Ireland (“the Insolvency Service”) that will oversee the non-judicial personal insolvency system. This body will have a role in the debt settlement process and will maintain a register of the settlement arrangements.

In order to protect the constitutional rights of all concerned, provision has been made for Circuit Court oversight of these three new procedures.

The Act provides for the appointment of a Personal Insolvency Practitioner (“PIP”) for DSA and PIA arrangements. Part 3, Chapter 2, provides for a range of practical matters in regard to the appointment of a PIP, the duties and obligations on such a practitioner and the documents to be prepared in an application for a DSA or PIA. A key requirement of all settlement arrangements is the provision for the completion of the Prescribed Financial Statement by the debtor with the assistance of the personal PIP which also must be verified by means of a statutory declaration. These statements are the critical element in the application for the debt resolution processes.

The Act also provides significant reform of the Bankruptcy Laws in Ireland. The critical new element is the introduction of automatic discharge from bankruptcy, subject to certain conditions, after 3 years as opposed to 12 years at present. This development moves Ireland to the European norm for such discharge.

1. Debt Relief Notices (Part 3, Chapter 1)

A DRN allows full write-off of qualifying unsecured debt up to €20,000 for persons with little or no income or assets and who are insolvent with no realistic prospect of being able to pay their debts within the next 3 years (this has been reduced from 5 years following the Committee stage). The process aims to provide a low cost insolvency option having regard to the extent of the debts involved. Applications for a DRN must be submitted on behalf of the debtor by an authorised approved intermediary body, for example, the Money Advice and Budgeting Service. The approved intermediary’s (“AI”) role would be to advise the debtor as to their options and the qualifying requirements, assist in the preparation of the necessary Prescribed Financial Statement and any other required documentation, and if the qualifying criteria are met, transmit the debtor’s application to the Insolvency Service to have a DRN approved.

The specific eligibility criteria for a DRN in addition to being insolvent includes that the debtor will have a net monthly disposable income of €60 or less after provision for "reasonable" living expenses and payments in respect of excluded debts (if any) and has assets to the value of €400 or less. There is an exemption from the asset test for essential household appliances, tools and other items required for employment or business and one motor vehicle up to value of €1,200. The excluded debts include taxes, court fines, family maintenance payments and service charges arrears.

In contrast to the DSAs and PIAs, the DRN is proposed by the debtor to the Insolvency Service through an AI, rather than to creditors. On receipt of the completed application, the Insolvency Service shall consider it and make such enquiries as it considers appropriate to verify the information, including enquiries with the Department of Social Protection and the Revenue Commissioners. The Insolvency Service will notify the AI and the creditors of its decision to issue the DRN and register it in the Register of Debt Relief Notices. The effect of the issue of the DRN is that the debtor is subject to a supervision period of three years. During that period, creditors may not initiate or prosecute legal proceedings or seek to recover payment for a debt or recover goods or contact the debtor. At the expiration of the three year supervision period (and subject to no other action), the DRN terminates and the qualifying debts are discharged. The debtor will be removed from the Register of Debt Relief Notices.

Only one DRN per lifetime is permitted and not within 5 years of completion of a DSA or PIA. There is a restriction on the debtor from applying for credit over €650 during the DRN supervision period without informing the person of his status.

2. Debt Settlement Arrangement (Part 3, Chapter 3)

A DSA allows for settlement between a debtor and one or more creditors to repay an amount of unsecured debt over a period of up to 5 years (with possible agreed extension to 6 years) where a debtor’s liabilities are €20,001 and over. The DSA would assist persons who have such income, assets and debts that fall outside the eligibility criteria for a Debt Relief Notice. The Chapter provides for all aspects of the eligibility, application, determination, duties and obligations arising under the DSA process.

In order to apply for a DSA, a debtor must appoint a PIP to make the application to the Insolvency Service on their behalf. The PIP must advise a debtor of the following:

1. Their options in regard to insolvency processes
2. The preparation of the necessary Prescribed Financial Statement (which must be verified by means of a statutory declaration) and any other required documentation
3. If the qualifying criteria are met, to apply to the Insolvency Service for a Protective Certificate in respect of the preparation of a DSA.

The debtor must normally be resident in the State or have a close connection to the State and only one application for a DSA in a lifetime is permitted. Excluded debts from the DSA include Court fines in respect of a criminal offence, family maintenance payments, taxes, local authority charges and service charges, unless the relevant creditor agrees otherwise. Of relevance to creditors is that any debt that would have a preferential status in bankruptcy will also have a preferential status in a DSA.

Once the Insolvency Service is satisfied as to the application, it shall issue a certificate to that effect and furnish the certificate and supporting documentation to the Court. The Court will consider the application and, subject to the creditors’ right to appeal, if satisfied issue the Protective Certificate and notify the Service. Once approved, the Protective Certificate is registered in the Register of Protective Certificates and a "stand-still" period of 70 days (extension for further 40 days by order of Court) applies to permit the PIP to propose a DSA to the listed creditors. The PIP will inform the creditors of the issue of the Protective Certificate. The effect of the issue of the Protective Certificate is that the unsecured creditors may not initiate or prosecute legal proceedings or seek to recover payment for a debt or recover goods or contact the debtor. The rights of secured creditors are unaffected.

Of relevance to a debtor is that a DSA proposal does not require the debtor to dispose of or cease to occupy their principal private residence where appropriate. Once the DSA proposal is accepted (by 65% in value of the creditors present and voting) it is binding on all creditors. The PIP shall inform the Insolvency Service who shall then transmit the agreement to the relevant court for approval. If satisfied and if no objection is received by it within 10 days, the Court shall approve the DSA and notify the Insolvency Service who will register it in the Register of Debt Settlement Agreements whereupon it comes into effect. The PIP will then administer the DSA for its duration. Of note is that the Insolvency Service has no role in the negotiation and agreement of a DSA.

A DSA allows for various repayment options however, the default position unless otherwise agreed, is that creditors be paid on a pari-passu or proportionate basis. Conditions do attach to the conduct of the debtor during the DSA. There is also provision for an annual review of the financial circumstances of the debtor and the agreement could, if necessary, be varied or terminated. Once the obligations in the DSA are fulfilled by the debtor, the debtor will be discharged from the remainder of the unsecured debts covered by the DSA.

3. Personal Insolvency Arrangements (Part 3, Chapter 4)

A PIA provides for an arrangement between a debtor and one or more creditors to repay an amount of both secured and unsecured debt over a period of 6 years (with possible agreed extension to 7 years) where a debtor’s liabilities are between €20,001 and €3,000,000. The PIA would assist those persons who have difficulty in the repayment of both secured debt (e.g. mortgage arrears) and unsecured debt.

As for a DSA, a debtor must appoint a PIP to make the application to the Service on their behalf. The PIP must provide the same advices that apply for a DSA however, in addition, a debtor may only propose a PIA if he or she is cash flow insolvent (i.e. unable to pay his or her debts in full as they fall due) and there is no likelihood within a period of 5 years that the debtor will become solvent. The qualifying criteria also includes cooperation with a secured creditor in respect of the debtor’s principal private residence, under a mortgage arrears process approved or required by the Central Bank.

As for a DSA, the PIP can apply, if the qualifying criteria are met, for a Protective Certificate in respect of the preparation of a PIA. The debtor must normally be resident in the State or have a close connection and only one application for a PIA in a lifetime is permitted.

The same excluded debts for a DSA apply to a PIA and again any debt that would have a preferential status in bankruptcy will also have a preferential status in a PIA .

The same process for issuing a Protective Certificate for a DSA applies to a PIA. Once the Court issues the Protective Certificate, it will be registered in the Register of Protective Certificates and a "stand-still" period of 70 days (extension for further 40 days by order of Court) applies to permit the PIP to propose a PIA to the listed creditors. If the PIA proposal is accepted, it is binding on all creditors. A PIA must be supported by at least 65% of all creditors voting at the creditors meeting (based on the value of the total of both secured and unsecured debt owed to those voting creditors) and more than 50% of secured creditors voting (based on the lesser of value of the security underpinning the secured debt or the amount of that debt) and 50% of unsecured creditors (based on the amount of the debt). The PIP will inform the Insolvency Service of the agreement who will transmit the agreement for Court approval and, subject to the Court receiving no objections from creditors within 10 days, the Insolvency Service will on receipt of Court approval, register the PIA on the Register of Personal Insolvency Arrangements. As for a DSA, the Insolvency Service has no role in the negotiation and agreement of a PIA. The PIP will administer the PIA for its duration.

Of note for secured creditors is that a PIA proposal does not require the debtor to dispose of or cease to occupy their principal private residence where appropriate, however there are certain specific protections for secured creditors, including a "claw back" in the event of a subsequent sale of a mortgaged property where the mortgage has been written down.

At the satisfactory conclusion of the PIA, all unsecured debts covered by it are discharged. Secured debts are only discharged at the conclusion of the PIA, if and to the extent, specified in the PIA. To the extent that they are not provided for in the PIA, all other debt obligations will remain for the debtor.

Bankruptcy (Part 4)

The Act provides for a number of amendments to the Bankruptcy Act 1988 to provide for a more enlightened, less punitive and costly approach to bankruptcy.

The main new provisions include:

• A new minimum amount for a creditor or combined non-partner creditors petition for bankruptcy of €20,000 (The current limits are €1,900 for a creditor and €1,300 for combined non-partner creditors);
• The automatic discharge from bankruptcy after 3 years from the date of adjudication (reduced from the current 12 years);
• Bankruptcies existing for 3 years or more at the time of commencement of the Act will be automatically discharged after a further six months have elapsed, this latter time to allow for any creditor objection.

Main Issues arising from the Act

1. One of the controversial features of the Act is that there is no requirement on a major creditor to accept the settlement proposal of a debtor. Instead, the settlement arrangement can only be imposed on unwilling minority creditors where a certain threshold of support is forthcoming from the entirety of the creditors subject to any creditors having a right of objection or appeal to the Courts. Essentially, this arrangement affords the Banking community a veto over the ultimate effectiveness of this new and long awaited law.
2. It had been highlighted that there is a need for the Oireachtas to examine bankruptcy tourism which has risen in the past few years particularly to the UK. The Act provides for the discharge of bankruptcy after 3 years and the equivalent period in the UK is one year. Perhaps, the Oireachtas should have considered given the close relationship between Ireland and the UK, whether the period in Ireland should mirror that of the UK. The argument in favour of this is that many entrepreneurs based in Ireland have experienced financial difficulty either by their own fault or as a result of the economy, and are now relocating within the UK so that their centre of main interest is in the UK which would allow them to avail of the one year bankruptcy, if necessary. Such entrepreneurs are now more likely to be lost to the Irish economy in the future. Many will argue that a one year period is too short for Ireland however the essence of bankruptcy is that almost all of the assets of an individual are lost to the individual for the benefit of that individual’s creditors.
3. Preferential status has been provided for certain creditors under DRNs, PIAs, and DSAs by the exclusion of certain debts including Court fines in respect of a criminal offence, family maintenance payments, taxes, local authority charges and service charges, unless the relevant creditor agrees otherwise.
4. Of relevance to legal practitioners, is the creation of the AI and PIP. The Act provides that the Minister may prescribe certain criteria for authorisation of persons as AIs and may designate a person to regulate PIPs. No definitive approach has been made as to whether AIs or PIPs will be automatically accredited if they are members of the legal or accountancy professions. Experienced solicitors would appear to be sufficiently qualified to act as AIs or PIPs and there is a strong argument for such professionals not having to specifically apply for such accreditation. The Law Society has recently lodged submissions on the licensing and regulation of PIPs under the Act recommending that solicitors should be entitled to be PIPs and that the Law Society should be the licensing and regulatory authority for solicitor PIPs.
5. The process envisaged by this Act is quite complex and legalistic and may in many instances warrant legal advice to debtors availing of this machinery.
6. The role of the Circuit Court in reviewing and deciding on whether to approve a particular settlement arrangement seems an unnecessary added layer of bureaucracy. Clearly, the Courts should have a supervisory role to intervene where a party claims that their rights are disproportionately affected but to involve the ordinary Courts in ratifying each settlement agreement does appear excessive.
7. The Act is silent when it comes to funding and costing arrangements for AIs and PIPs albeit, not unexpectedly. Such issues will undoubtedly represent significant practical concerns on whether the scheme can work for certain debtors.
8. The requirement that a debtor must not be in a position to realistically discharge his or her debts over the next 5 years in order to qualify for a DSA and PIA may prove a barrier to entry for many debtors seeking to avail of this process.
9. The lifespan of DSAs and PIAs in terms of 5/7 years may be argued to be disproportionately high when the same Act reduces the lifespan of a bankrupt to a period of 3 years.