Proposed New Laws for Personal Insolvency

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1 Proposed New Laws for briefing Draft legislation proposes to alter the law and procedures of personal insolvency in radical ways. The proposals include the establishment of an independent Insolvency Service of Ireland and the introduction of new procedures for addressing unsecured debts (of any value) and secured debts (up to 3 million in aggregate but without limit in the case of agreement). Current bankruptcy laws would also be amended, principally to increase the minimum level of debt required to enter bankruptcy to 20,000 and to reduce the bankruptcy term from 12 years to three. On 29 June 2012 the Minister for Justice and Equality published the Bill 2012 which is set to amend the laws and procedures of personal insolvency in radical ways. As draft legislation, the Bill may be amended in the Houses of the Oireachtas (the Irish Parliament) although it is expected to be enacted in Lenders and other creditors in particular should be aware of these anticipated changes. Scope of the Proposals The proposed changes would apply only to personal insolvencies: the Bill would not affect the law on the winding up of companies, receivership or examinership. Insolvency Service The Bill proposes the establishment of an independent Insolvency Service of Ireland to oversee and operate a personal insolvency system. Practitioners The Bill proposes the appointment and regulation of personal insolvency practitioners ( PIPs ) for the purposes of the two higher-value insolvency procedures. The detail of the proposed regulatory arrangements is yet to be announced.

2 Judicial Role For the purposes of the various new procedures that the Bill proposes, the Circuit Court would determine applications concerning liabilities up to 2.5 million and the High Court would determine all other applications. New and Varied Procedures The Bill proposes three new personal insolvency procedures and variations to the existing court-based bankruptcy process. The new procedures would be largely non-judicial, overseen primarily by the Insolvency Service, but each would culminate in a judicial order: debt relief notice: this would be available in respect of unsecured and secured debt where the value is 20,000 or less; debt settlement arrangement: this would be available in respect of unsecured debt only, of any value; and personal insolvency arrangement: this would be available in respect of both secured debt up to 3 million (but without limit if every secured creditor agrees) and unsecured debt (without limit of value). A range of criminal offences would apply in respect of dishonest behaviour by a debtor in connection with any of the new procedures. (1) Debt Relief Notice A debt relief notice could be sought by a person: who is domiciled or resident in the State or who has resided in the State recently; who is unable to pay his or her debts and is unlikely to become solvent within five years; whose qualifying debts are 20,000 or less in value; and whose assets and savings and net disposable income each are below prescribed levels. Safeguards would prevent the use of the procedure where 25% or more of the qualifying debt has been incurred within six months of the application for a debt relief notice. An application would be made through an approved intermediary (which the Minister for Justice and Equality has said is likely to include the Money Advice and Budgeting Service), paid out of fees collected by the Insolvency Service, who would review the debtor s financial information and present it to the Insolvency Service. Following a review of the application by the Insolvency Service (including any supplementary queries it may raise), the Insolvency Service would decide whether, on the basis of prescribed criteria, to certify that the application is in order and would pass a copy of the certificate and of the supporting documentation to the Circuit Court to determine whether to issue a debt relief notice. If the court were to issue a debt relief notice, the notice would be entered in a public register and there would be a moratorium on the enforcement of the qualifying debts (but not any other debt of the person) for three years at the end of which time the debts specified in the notice (but no others) would be written off. However, the write-off of a secured debt pursuant to a debt relief notice would not affect the right of a secured creditor to enforce the relevant security. Special rules would apply if a debtor s financial circumstances were to improve (such as through a windfall or increased regular income) while a debt relief notice is in force, so that the gain would be shared 50:50 with the relevant creditor(s), and a debtor would have the option to exit the debt relief process early with the relevant debt(s) being extinguished fully by making a bullet payment of 50% of the relevant debt(s). A debtor would be restricted in applying for credit during the three-year supervision period without informing the creditor that the debtor is subject to a debt relief notice. mccann fitzgerald july 2012

3 A creditor and a debtor each would, during the three-year supervision period, have limited rights to challenge in court any decision of the Insolvency Service leading to or in respect of a debt relief notice; this would include a potential objection by a creditor to the inclusion of a particular debt in the relevant application or debt relief notice. Although a debt relief notice could apply to a secured debt (such as a mortgage), this is likely to be of limited practical relevance: a debtor could qualify for the debt relief notice procedure only if his or her non-exempted assets and savings are worth 400 or less. A person would only be entitled to avail of the debt relief notice procedure once in his or her life and never in combination with or within five years of availing of any other insolvency procedure. (2) Debt Settlement Arrangement A debt settlement arrangement could be proposed by a PIP on behalf of a person who is domiciled or ordinarily resident in or who carries on a business in the State if that person is unable to pay his or her personal and/or business debts and where other criteria are satisfied. Those other criteria include that the relevant debts are unsecured. The debt settlement arrangement procedure could not apply to a secured debt. A debtor would have to make detailed financial disclosure to the PIP. If accepted by the Insolvency Service on the basis of set criteria the matter would be transferred to the appropriate court which could issue a protective certificate, imposing a 70-day moratorium on the enforcement of the relevant debts (the court may extend that period by no more than 40 days). During that moratorium, the PIP would propose a debt settlement arrangement to the relevant creditor(s) in a special meeting called for that purpose. The proposed arrangement would involve the payment of an agreed proportion of relevant debts over a period of five (perhaps extended to six) years but, where possible, would seek to avoid requiring the debtor to dispose of the debtor s interest in his or her principal private residence. A debt settlement arrangement that is accepted by at least 65% in value of the unsecured creditors present and voting in a creditors meeting would bind every unsecured creditor. An arrangement would, by default, provide for equal treatment of all creditors but other arrangements may be agreed, subject to review by the court. The Insolvency Service would then transmit the proposed debt settlement arrangement to the court for approval and, if approved, it would be entered in a public register. A creditor would not then be permitted to commence any other insolvency procedure in respect of the particular debt(s) and, if the arrangement is performed in accordance with its terms, the debtor would be discharged fully from the relevant debt(s). The debt settlement arrangement procedure would include an implicit incentive for the PIP and the debtor to make to the creditors a proposal that is reasonable in the circumstances: if the creditors were to reject a proposal, then the debtor s protection would end and he or she would be vulnerable to bankruptcy proceedings. A preferential debt within the meaning of the current bankruptcy laws (such as wages and salary owed to an employee) would remain a preferential debt in any debt settlement arrangement. A range of other debts are specified as not being capable of release under the arrangement unless the relevant creditor agrees in writing to a compromise of the particular debt (eg taxes, service charge arrears and family law payments). A creditor would have limited rights to challenge in court the granting of a protective certificate and the making of a debt settlement arrangement. A person would only be entitled to avail of the debt settlement arrangement once in his or her life and never in combination with or within a prescribed period of time of availing of another insolvency procedure. briefing proposed new laws for personal insolvency

4 (3) Arrangement A PIP may propose a personal insolvency arrangement on behalf of a person who: is domiciled, or is or has recently been resident in or carries on or has recently carried on business in, the State; owes a debt to at least one secured creditor (such as a mortgage lender); has secured debts up to 3 million (but without limit if every secured creditor agrees); is cash-flow insolvent ; on a thorough assessment of his or her circumstances (including contingent and prospective assets, income and liabilities) is unlikely to be able to pay his or her debts over the course of a five-year period; and in respect of a debtor s principal private residence, has, for at least six months prior to the application, co-operated with his or her secured creditors under any applicable Central Bank Code (such as the Code of Conduct on Mortgage Arrears), but without any alternative repayment arrangements having been agreed. The initial procedures to lead to a personal insolvency arrangement would be similar to those for a debt settlement arrangement: a debtor would have to make detailed financial disclosure to the PIP and, if accepted by the Insolvency Service on the basis of set criteria, the matter would be transferred to the appropriate court which could issue a 70-day (extendible by 40 days) protective certificate to impose a moratorium on the enforcement of the relevant debts. During that moratorium, the PIP would propose a personal insolvency arrangement to the relevant creditor(s) in a special meeting called for that purpose. The proposed arrangement would involve the payment of an agreed proportion of relevant debts secured as well as unsecured over a period of six (perhaps seven) years. A proposed personal insolvency arrangement would have to be considered and approved by a qualified majority of 65% in value of all creditors actually voting, subject to support from more than 50% (in value) of unsecured and more than 50% (in value of the lesser of the debt or the security) of secured creditors, meeting together for that purpose. If approved by the required margin, the arrangement would become binding on every creditor (secured and unsecured). However, if a proposed arrangement were not to be approved, the protective period would end and the debtor would be vulnerable to other enforcement procedures (including bankruptcy). Special procedures would apply to assessing and representing the interests of a secured creditor, in particular if the arrangement were to propose that the secured property is sold as part of the compromise with creditors. A secured creditor would also benefit from a number of safeguards in the process, primarily that, if secured property is to be sold, the secured creditor must receive at least the value of the security or the amount of the debt (including principal, interest and arrears), whichever is the lesser. Special procedures would also apply to the inclusion of a debtor s principal private residence in a personal insolvency arrangement. A personal insolvency arrangement would have to be formulated so that, so far as reasonably practicable, the debtor would not have to vacate his or her home. In the event that a proposed arrangement would entail a disposal of the debtor s interest in his or her principal private residence, the debtor would have to receive (or to decline) independent legal advice. mccann fitzgerald july 2012

5 Interlocking personal insolvency arrangements may be permitted in respect of joint liabilities or where there is a close financial relationship between the parties. If a personal insolvency arrangement were to be approved and performed according to its terms, then, at the end of the relevant period, the remaining unsecured debts within the arrangement would be discharged and the remaining amount (if any) of the secured debts would be reduced or restructured in accordance with the terms of the arrangement. A preferential debt within the meaning of the current bankruptcy laws (such as wages and salary owed to an employee) would remain a preferential debt in any debt settlement arrangement. A range of other debts are specified as not being capable of release under the arrangement unless the relevant creditor agrees in writing to a compromise of the particular debt (eg taxes, service charge arrears and family law payments). A person would only be entitled to avail of the personal insolvency arrangement once in his or her life and never in combination with or within a prescribed period of time of availing of another insolvency procedure. (4) Bankruptcy This procedure would continue to apply to unsecured and secured debt, of any amount over 20,000, and would be the only process available for a secured debt greater than 3 million (unless every secured creditor agrees to using a personal insolvency arrangement) and certain other debts that are excluded from the new procedures (eg taxes). The principal changes proposed to be made to current laws are: the bankruptcy period would be reduced from 12 years to three; the court could order the debtor to make payments to creditors for up to five years (provided the application for such order is made within the three-year discharge period); a debt of 20,000 or less could not be pursued in bankruptcy. briefing proposed new laws for personal insolvency

6 Further information is available from: Jane Marshall Partner, Restructuring & Insolvency ddi Michael Murphy Parter, Restructuring & Insolvency ddi Ambrose Loughlin Partner, Head of Banking & Financial Services ddi Peter Osborne Consultant ddi This document is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed. Principal Office Riverside One, Sir John Rogerson s Quay, Dublin 2 Tel: Fax: Winner 2012 Brussels 40 Square de Meeûs, 1000 Brussels Tel: Fax: London Tower 42, Level 38C, 25 Old Broad Street, London EC2N 1HQ Tel: Fax: McCann FitzGerald, July www.