PERSONAL INSOLVENCY PRACTITIONER

Transcription

1 PERSONAL INSOLVENCY PRACTITIONER EXAMINATION - PILOT PAPER INSTRUCTIONS TO THE CANDIDATE: SECTION A: Answer Question 1, and SECTION B: Answer any 2 from Questions 2, 3 and 4. Time Allowed 2 hours plus 15 minutes to read the paper. Examination Format This is an open book examination. Hard copy material may be consulted during this examination subject to the limitations advised on the CPA Ireland s website. Reading Time During the reading time you may write notes on the examination paper but you may not commence writing in your answer booklet. Marks Marks for each question are shown. A mark of 50 or more is required to achieve a pass in this paper. Answers Start your answer to each question on a new page. You are reminded that candidates are expected to pay particular attention to their communication skills. Care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of the candidates answers and the extent to which the answers are supported with relevant legislation, case law or examples where appropriate. Answer Booklets List on the cover of each answer booklet, in the space provided the number of each question attempted. Additional instructions are shown on the front cover of each answer booklet. CPA Ireland, 17 Harcourt Street, Dublin 2.

2 CPA IRELAND, ACCA, CIMA PERSONAL INSOLVENCY PRACTITIONER EXAMINATION - PILOT PAPER Time Allowed: 2 hours plus 15 minutes to read the paper. SECTION A - Compulsory Question Cite any relevant authorities and/or statutory provisions to support your answers 1. Abbey lived with Harrison, her partner, for in excess of 15 years (although they never married). They had two children during this relationship, Charlotte (now aged 13) and Amelie (now aged 15 months). They lived in a property owned by Harrison (which he had inherited from his grandmother). Six months ago Abbey discovered that Harrison had been having an affair with a work colleague for over two years, and she left Harrison taking the children with her. She is now renting a two bedroom house, at a monthly cost of 700. Although Abbey is in fulltime employment as a Human Resource Manager she is finding it really difficult to pay her debts at the end of every month. Her monthly net income is 2,900 plus 540 per month from Harrison in respect of the maintenance of the children. Her debts are as follows: (1) Credit cards debt of 28,350 (2) Store card debt of 4,500 (3) An unsecured bank loan (taken out in 2012) with a balance of 3,000 this loan was used to part-finance Charlotte s first year tuition fees in a private second level college (4) A credit union loan taken out in 2007 with a balance of 22,000. Additionally, Abbey s daughter Amelie is lactose intolerant and requires special food, which costs 80 per month. Furthermore because Abbey works full-time Amelie attends a local crèche, which costs 600 per month. In terms of assets, Abbey has a savings of 1,000, a car valued at 11,000, furniture and household equipment valued at 5,000, and a savings bond in the amount of 4,000 which was a birthday gift from her mother. Abbey believes that she is insolvent, as her current obligations in relation to the various debts exceed her monthly income. She has contacted you, a Personal Insolvency Practitioner (PIP), for advice, as to whether she should obtain a Debt Settlement Arrangement (DSA). REQUIREMENT: Define (in brief) the nature of a Debt Settlement Arrangement. (3 marks) (c) (d) On the assumption that Abbey is eligible, examine the procedure that must be followed by the Personal Insolvency Practitioner to obtain a DSA. In particular, you answer should address (1) the consultation stage (4 marks), (2) the application stage (10 marks), (3) the Protective Certificate stage (5 marks), (4) the proposal stage (8 marks), and (5) the enforcement stage (3 marks). (30 marks) Critically review Abbey s current expenditure and assets and advise her as to their reasonableness in the context of a DSA. (7 marks) Determine, in light of your advice in Part C, the actual financial position of both Abbey and her creditors assuming successful completion of the DSA. (10 marks) [Total: 50 Marks] Page 1

3 SECTION B Answer ANY TWO of the THREE questions in this Section Cite any relevant authorities and/or statutory provisions to support your answers 2. Mason, a 35 year-old self-employed electrician, entered into a Personal Insolvency Arrangement (PIA) two years ago and you acted as his Personal Insolvency Practitioner (PIP). As a consequence of your on-going review obligations you have discovered in the six months prior to entering the PIA Mason repaid a personal loan to his father in the amount of 2,000. Mason did not disclose this payment when completing his Prescribed Financial Statement and his business accounts did not reflect this payment. REQUIREMENT: Assess the impact of this non-disclosure and determine the action that you should take in the circumstances. Comment also on any criminal sanctions that Mason may be exposed to as a consequence of this non-disclosure and the applicable penalties. (10 marks) In the context of a PIA evaluate the specific prerequisites applicable to secured debt before entering into such an agreement, and review the options available for dealing with the restructuring of secured debt under the terms of any such agreement. Note: A discussion of general eligibility requirements is not required. (15 marks) [Total: 25 Marks] 3. Review the main role of the Insolvency Service of Ireland (ISI) pursuant to the provisions of the Personal Insolvency Act (20 marks) Winston operated a patisserie, in a sole trader capacity for a period in excess of 5 years. Due to the downturn in the economy his business closed last year. In addition to his personal debt, Winston has a number of business debts outstanding. In particular, Winston owes in excess of 3,000 to his Local Authority in relation to unpaid rates and charges. He has contacted you for the purpose of entering into a Debt Relief Notice (DRN) and seeks your specific advice in relation to his 3,000 liability. Advise Winston on how you plan on dealing with this 3,000 liability and the steps you will take to ensure that it is covered by the terms of the DRN. (5 marks) [Total: 25 Marks] 4. The Insolvency Service imposes specific obligations in relation Regulatory Standards and Requirements on all approved Personal Insolvency Practitioners. In particular all practitioners are subject to requirements regarding (1) Independence; and (2) Complaints Handling. REQUIREMENT: Analyse the specific obligations imposed upon all Personal Insolvency Practitioners in respect of: Ensuring their independence and (10 marks) Complaints handling. (15 marks) [Total: 25 Marks] END OF PAPER Page 2

4 SUGGESTED SOLUTIONS CPA IRELAND, ACCA, CIMA PERSONAL INSOLVENCY PRACTITIONER EXAMINATION - PILOT PAPER SOLUTION 1 Nature of a DSA A Debt Settlement Arrangement is a statutory arrangement between a debtor, who is insolvent and their creditors. It only applies to unsecured debt and lasts for 5 years. During the arrangement the debtor pays a sum (agreed through a Personal Insolvency Practitioner with the creditors, approved by the Insolvency Service and the Courts) towards their debts, and at the end of the 5 year period the balance is written off as a bad debt, and the debtor is deemed to be solvent. Procedure to Obtain a DSA In accordance with Part 3, Chapter 3 of the legislation there are a variety of stages involved in obtaining the DSA. Stage 1 Review Stage: The debtor will be required to meet with the Personal Insolvency Practitioner (PIP), providing them with accurate and complete financial details. The PIP should explain to the debtor the nature of the DSA and its impact, as well as its likely costs. The PIP should also provide the debtor with information on fee arrangements and other relevant conditions of their appointment. Following this consultation the debtor must consent to the appointment of the PIP and the PIP must confirm his agreement to this appointment in writing. (0-4 marks) Stage 2 Application Stage: The PIP will then assist the debtor in the preparation of the Prescribed Financial Statement. Upon completion of this statement the PIP will be required to advise the debtor on their suitability for a DSA (or alternative debt settlement options), as well as the debts that will be included, excluded and those that are excludable from the terms of the DSA. The debtor must then instruct the PIP, in writing to obtain a DSA on their behalf. Following this authorisation the PIP will be required to review the Prescribed Financial Statement and prepare a statement confirming that it is true and accurate, that the debtor is eligible for a DSA, that there is no likelihood of the debtor becoming solvent within 5 years, but that if the debtor enters the DSA there is a likelihood of them becoming solvent within 5 years. The debtor will then be required to complete a statutory declaration to the effect that the information they provided in the Prescribed Financial Statement is complete and accurate in relation to their assets, liabilities, income and expenditure. They must then complete and sign certain documents (statements made by the PIP, confirmation of eligibility, schedule of creditors and the amount owed etc...) as well as some consent forms for the disclosure and processing of data (in accordance with the obligations imposed by the Data Protection Acts , as amended). (0-10 marks) Stage 3 The Protective Certificate Stage: The PIP then submits the completed application form to the Insolvency Service for consideration. If all the information supplied is correct the Insolvency Service will then forward the application to the Court. Where the debts are in excess of 2.5m the application should be to the High Court, if the debts are less than 2.5m the application should be to the Circuit Court. Page 3

5 If the Court approves the application they will grant a Protective Certificate, which provides the debtor will immunity from legal action in respect of the debts included in the application for the DSA. The PIP then must notify the debtor that the Protective Certificate has been granted and details of this Certificate will then be placed on a public Register maintained by the Insolvency Service. (0-5 marks) Stage 4 The Proposal Stage: On receipt of the Protective Certificate the PIP needs to formulate a DSA proposal, and to do this he engages with the debtor regarding their reasonable living expenses, and the creditors impacted by this proposal and seeks their submissions. The PIP will then assess these submissions and prepare a workable proposal for dealing with the debt. The debtor must then be provided with a copy of this proposal and confirm agreement in writing and agreement for the PIP to engage with their creditors. The PIP will then convene a creditors meeting for the purpose of negotiating with them and attempting to obtain their agreement to the DSA. The PIP will provide the creditors with all relevant documentation in this regard, and the creditors will then be required to vote on the proposal. The proposal for the DSA will be deemed passed by a vote in favour of a majority of creditors representing not less than 65% in value of the total debt who are attending and voting at the creditors meeting. If passed by the creditors the Insolvency Service must be notified and will also be required to consent to the DSA (subject to a creditor s objection). (0-8 marks) Stage 5 Enforcement Stage: The Insolvency Service must notify the Court that the creditors have consented to the arrangement, and the Court must also approve the arrangement. If they consent the PIP notifies the debtor and the DSA comes in effect. Details of the arrangement and the debtor are then entered onto a public Register. (c) Reasonableness of Abbey s Assets and Expenditure In terms of Abbey s expenditure, her accommodation costs, crèche costs and additional food costs (as a consequence of her daughter s medical condition) are likely to be classed as reasonable. The reasonableness of accommodation expenses are generally determined by reference to the practitioner s knowledge of the local housing market and publicly available data sources (such as CSO, PRTB databases, Residential Property Price Register, Quarterly Daft Report etc ) and in the circumstances it is likely that Abbey s 700 spend (in respect of herself and her two children) is not excessive. Similarly, a 600 outlay on crèche fees in respect of an infant child should be classed as reasonable. The practitioner should also advise her that the continuation of private school fees for her daughter are not likely to be classed as reasonable expenditure by her creditors and should be reviewed with her daughter s father. (0-1 mark) In terms of assets, the PIP should advise Abbey that her savings and in particular the savings bond will have to be used to repay some of her creditors, and that her vehicle is of excessive value and should probably be sold and a more reasonable vehicle purchased (a vehicle valued at no more than 5,000 is likely to be classed as reasonable). The PIP should also assess whether Abbey requires a car and is not in a position to avail of public transport although given that she will be responsible for ensuring her children are at school and the crèche, the use of a car is not unreasonable. Page 4

6 (d) Abbey s financial position on successful completion of the DSA Assets Monthly Income Savings 5,000 Monthly Net Income 2,900 Domestic Assets 5,000 Maintenance 540 Car 11,000 Total 22,000 Total 3,440 Debts Monthly Expenses Credit Cards 28,350 Total Set Costs 1,726.64* Store Cards 4,500 Rent 700 Credit Union Loan 22,000 Supplementary Food Cost 80 Personal Loan 3,000 Creche fees 600 Total 57,850 Total Living Expenses 3, Total Disposable Income available *Table 4, One Adult Household, one or more children, vehicle Total Debt 57,850 Less Savings 5,000 52,850 Less Profit from Sale of Car 6,000* 46,850 Less fees of PIP 4,000* 42,850 Less Disposable Income x 60 months (5 year arrangement) x 60 = 20, , * Or any other reasonable amount This means that the creditors will potentially receive a total of 31, (excluding the payment to the PIP) from the total of 57,850 owed therefore each of them will receive approx % of their debt outstanding. At the end of the agreement Abbey will have paid 27, to her creditors, 4,000 to the PIP, and the balance of 26, will be written off as a bad debt, and Abbey will be solvent. (0-4 marks) Page 5

7 SOLUTION 2 Non-Disclosure in relation to a PIA The action of Mason in repaying a personal loan to his father in priority to his other debts is likely to be classed as a fraudulent preference. Section 286 of the Companies Act 1963 defines a fraudulent preference as arising, where in the case of insolvency, a payment is made in favour of one creditor for the purpose of giving them preference over another creditor (0-2 marks). The failure to disclose this payment by Mason in his Prescribed Financial Statement is an offence under Section 26 and 28 of the legislation (0-1 mark). This offence carries a sanction of a Class A fine or a term of imprisonment not exceeding 12 months or both, where prosecuted summarily. Where an offence is prosecuted on indictment, the debtor may be subject to a fine not exceeding 100,000 or a term of imprisonment not exceeding 5 years or both (0-2 marks). In accordance with Section 122(1) the Personal Insolvency Practitioner should apply to the Court to have the agreement terminated based on Mason s non-disclosure. If the Court sanctions this termination the Arrangement is brought to an end (0-2 marks). The consequences of this premature termination are that Mason will be made fully liable for all specified debts, inclusive of arrears, charges and interest that have accrued during the PIA period, less any payments made by him during the time prior to termination, unless the terms of the PIA specify, or the court has ordered, otherwise. Secured Debts and a PIA In addition to the normal prerequisites for entering into a Personal Insolvency Arrangement (PIA), in the context of secured debts there are two specific prerequisite requirements, namely that: (1) The aggregate value of the secured debt is less than 3m (Section 91(1)). However, this maximum cap can be waived subject to obtaining the consent, in writing, of all the debtors secured creditors (0-2 marks); and (2) The debtor must make a declaration in writing stating that he has co-operated for a period of at least 6 months with his secured creditors as respect the debtor s principal private residence in accordance with any process approved or required by the Central Bank (Section 91(1)(g)) (0-1 mark). In general, this means that the debtor should have engaged in the Mortgage Arrears Resolution Process provided for in the Central Bank s Code of Conduct on Mortgage Arrears, and despite this fact the debtor has not been able to agree an alternative repayment arrangement or alternatively, the secured creditor has confirmed in writing his unwillingness to enter into an alternative repayment arrangement. However, this rule does not apply where the debtor s Personal Insolvency Practitioner (PIP) declares that the debtor would still not be likely to be solvent in 5 years if they accepted such an alternative repayment arrangement (0-2 marks). In relation to the restructuring of secured debt, the following are some of the options that can be considered (Section 102(6)): (1) The payment of interest only on foot of the secured debt; (2) The payment of interest plus a specified amount of the principal capital owed; (3) The deferral of payments due in relation to the secured debt; All three of these options are for a prescribed period of time only and this time period cannot exceed the duration of the PIA; (4) The extension of the time period for repayment of the debt; (5) The re-negotiation of the interest rate payable on the debt; (6) The addition of the arrears, plus interest to the principal due for an agreed time period; and (7) A reduction in the principal owed in light of the devaluation of the asset securing the debt (subject to potential future claw-back provisions, and the possible provision of further equity regarding the debt). (0-7 marks) Page 6

8 SOLUTION 3 Role of the ISI Pursuant to Section 9 of the Act, the main role of the ISI will revolve around the following: (1) Administering new debt settlement procedures these are threefold namely Debt Relief Notices, which facilitate a write-off of unsecured debt after a three year period, Debt Settlement Arrangements, which allow for the restructuring and potential write-off of a portion of unsecured debt after a five year period, and (c) Personal Insolvency Arrangements, which allow for the restructuring, renegotiation and potential write-off of debts (both secured and unsecured) after a six year period (0-3 marks) in particular they will consider applications for DRN s, process applications for Protective Certificates in relation to DSA s and PIA s, and (c) maintain a Register of Protective Certificates ; (2) Authorising approved intermediaries (AI) to act in relation to the implementation of Debt Relief Notices this involves prescribing minimum conditions to act in this capacity, oversight and provision of study and examinations for qualification, and the maintenance of a Register of qualified AI s; (3) Authorising and regulating Personal Insolvency Practitioners (PIP) to act in relation to the implementation of Debt Settlement Arrangements and Personal Insolvency Arrangements this involves prescribing minimum conditions to act in this capacity, oversight and provision of study and examinations for qualification, and the maintenance of a Register of qualified PIP s; (4) Investigating complaints against AI s or PIP s, and the imposition of sanctions in conjunction with the Court although minor sanctions can be imposed by the ISI without recourse to the Court (5) Developing guidelines in relation to Codes of Practice for AI s and PIP s, the insolvency procedures and regulations such as Reasonable Cost of Living Expenses in conjunction with the new debt settlement procedures; (6) Providing information regarding the new debt settlement procedures and the working of the Act to the general public through publications, their website and a dedicated phone service; (7) Monitoring the operation of the new procedures through the maintenance of Registers of DRN s, DSA s and PIA s specifically recording the success or failure of the process; (8) Contributing to policy development in this area by advising the Minister on any matters relating to the operation of their functions; (9) The maintenance of Registers of DRN s, DSA s and PIA s specifically recording the success or failure of the process; and (10) Absorbing some of the Courts functions in relation to bankruptcy in essence before a bankruptcy petition is accepted by the Court they must be satisfied that the new alternate debt settlement procedures have been considered as an alternative to the formal bankruptcy process. (any 7 of (2)-(9) x 0-2 marks = 14 marks) DRN s and Excludable Debt The Approved Intermediary (AI) should advise Winston that the outstanding debt owed to the Local Authority in relation to unpaid rates and charges is classed as an excludable debt (Section 2). This debt requires consent from the creditor before it is classed as a permitted debt (0-1 mark). In the circumstances (pursuant to Section 28) the AI should: (1) Contact the creditor (local authority), supplying a copy of the debtors financial affairs and request their consent in writing for a DRN to be issued in respect of the excludable debt; (2) The AI should inform the creditor that they are obliged to reply in writing to this request within 21 days; and (3) Failure by the creditor to respond within 21 days is deemed to be consent for the inclusion of the excludable debt. (4) The creditor has the right to refuse permission to have the debt include as a permitted debt. Page 7 (0-4 marks)

9 SOLUTION 4 Ensuring their Independence The Insolvency Service of Ireland (ISI) requires that: (1) A practitioner must be free from any undue influence/guidance or control that would prevent or hinder them in any material respect in relation to the discharge of their functions. (2) A practitioner must seek to avoid any conflict of interest that arises in the performance of their duties, and where such conflicts arise, or are likely to arise, they must comply with the Insolvency Services written conflicts of interest policy. (3) Prior to agreeing to act on behalf of a debtor, a practitioner must make a conflict of interest assessment in respect of the debtor and their creditors. (4) Where the practitioner becomes aware of a conflict (either before or during the tenure of the agreement) they must disclose in writing the nature of the conflict to the debtors and the creditors who are party to the agreement. If an objection is raised the practitioner must not take up or continue the appointment. (5) Where the practitioner engages in forms of business, in addition to their services as a personal insolvency practitioner, they are obliged to ensure that these businesses are segregated to prevent a conflict of interest, abuse thereof, or breach of confidentiality obligations arising. (6) The practitioner must ensure that they or their employees, servants or agents, do not offer, give, solicit, receive or accept any gifts or rewards (monetary or otherwise) arising from their relationship with debtors and creditors which conflict with their functions under the terms of the agreement. (any 5 x 2 = 0-10 marks) Complaints Handling: (1) All practitioners will be required to have written procedures in place for the proper handling of complaints received from debtors or creditors. De minimis these procedures should encompass an obligation to: A. Supply the complainant with the name and contact details of a specified individual with responsibility for handling the complaint and who will be the principal point of contact until the investigation of the complaint has concluded; B. Acknowledge, in writing, receipt of the complaint within 5 business days of its receipt; C. Provide the complainant with regular updates on the progress of the investigation of the complaint, and at a minimum at intervals not exceeding 20 business days; D. Attempt to resolve the complaint within 40 business days of its receipt; E. Advise the complainant of the outcome of the investigation within 5 business days of its completion; and F. If the complainant is not satisfied with the outcome of the investigation or the handling of the complaint, advise him or her, in writing, that he or she may refer the complaint to the Insolvency Service. (any 5 x 1.5 = marks) (2) The practitioner must maintain complete and up to date records in respect of each complaint received, containing the following information (as a minimum requirement): A. Details of each complaint; B. The date the complaint was received; C. A summary of the personal insolvency practitioner s response(s); D. The action taken to resolve the complaint; E. Copies of correspondence received and sent by the personal insolvency practitioner; F. The date the complaint was resolved or it was determined by the personal insolvency practitioner that the complaint could not be progressed any further; and G. Where applicable, the reason why the complaint could not be progressed any further. (any 6 x 1 = 0-6 marks) (3) The practitioner must make these records available to the Insolvency Service on request. (0-1.5 marks) Page 8