PERSONAL INSOLVENCY PRACTITIONER EXAMINATION - JUNE 2013 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 reference material may be consulted during this examination. 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.
CPA IRELAND, ACCA, CIMA PERSONAL INSOLVENCY PRACTITIONER EXAMINATION - JUNE 2013 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. Ryder and Anya both graduated from University in the year 2000, and thereafter they gained employment in the financial services sector. They married in 2004 and in 2005 purchased a house for 400,000 with a 100% mortgage. At the beginning of 2007 the couple decided to take an adult gap year and travel around the world and all of their savings were used to fund this. This did not cause them any concern as they assumed there would be no problems finding employment when they returned to Ireland. Unfortunately as a consequence of the financial crisis, which commenced in late 2007, both Ryder and Anya found it extremely difficult to gain employment. After searching for six months Anya managed to gain employment as a treasury analyst with a pensions and investment company, at an annual salary of 35,000, a reduction of 30% based on her previous earnings. Ryder was not so lucky, and was unemployed from 2008 to 2010. In late 2010 he finally managed to obtain employment as a claims administrator with an insurance company, at an annual salary of 25,000, a reduction of 50% on his previous earnings. Based on their current combined income Ryder and Anna are struggling to keep up with their financial commitments. From their combined monthly net take home pay of 4,114, they have a mortgage obligation of 2,100 per month, as well as a 1,000 per month obligation in relation to the repayment of a credit union loan (with a current balance of 38,000). In addition, Ryder and Anna have joint credit card debt of 23,000. Because of their financial situation, and Ryderʼs prolonged period of unemployment they are also in significant mortgage arrears. Following negotiation with their mortgage provider, in 2009 they took a payment break on their mortgage and since 2010 they have been paying interest only on the mortgage of 1,356 per month. However, the agreement they reached with their bank was that they would be allowed to pay interest only for two years, and thereafter they would resume full payments plus arrears. In recent months they have received numerous letters and telephone calls from their bank, requesting that they contact it regarding their mortgage, but Ryder and Anya have avoided doing this as they know that they are not in a position to make any additional payments on foot of this mortgage. Ryder and Anya have considered selling the property, but are not in a position to do this as the value of the property has fallen to 260,000 and they still owe 365,000 on the mortgage of this property. They have also considered letting the property and renting a smaller one, but after advertising the property for 6 months on an online site, they have not been able to secure a tenant. As their financial situation has no prospects for improvement they are now considering entering into a Personal Insolvency Arrangement (PIA). REQUIREMENT: (a) Explain the nature of a PIA. (6 marks) (b) Advise Ryder and Anya as to whether they are eligible to enter into a PIA, based on the information provided. Note: A detailed discussion of eligibility criteria is NOT required. (6 marks) (c) Examine the mandatory elements of every PIA. (16 marks) (d) Assess the main duties and obligations imposed upon the debtor throughout the tenure of the PIA. (10 marks) (e) If Ryder and Annaʼs circumstances change for the better, examine the procedure to effect a variation of their PIA. (12 marks) [Total: 50 Marks] Page 1
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. (a) Discuss any EIGHT features of a Debt Settlement Arrangement (DSA). (12 marks) (b) Riley obtained a Debt Relief Notice (DRN) through an Approved Intermediary (AI) eighteen months ago. At the time of obtaining the DRN his total permissible debts for the purpose of the agreement amounted to 16,700. Last weekend Riley won 100,000 on a lottery scratch card, and he has contacted you, as his AI, for advice as to how he should proceed in this situation. REQUIREMENT: (1) Advise Riley as to the options available to him in this situation highlighting the most appropriate. (7.5 marks) (2) In light of your advice in (1) review the procedures that should be adopted and their effect. (5.5 marks) [Total: 25 Marks] 3. You have recently been authorised to act as a Personal Insolvency Practitioner (PIP). As part of this authorisation the Insolvency Service of Ireland (ISI) has informed you that you are subject to its supervision, and that as part of that supervision you are required to notify ISI of certain situations that directly impact upon your authorisation in order to ensure transparency, and that you must maintain certain records for transparency purposes. REQUIREMENT: (a) (b) (c) Examine the nature of the supervisory role of the ISI in relation to authorised PIPs (4 marks), outlining the statements and reports that must be submitted to the ISI upon request (3 marks) and the stating the consequences of non-compliance (3 marks). (10 marks) Specify the main situations impacting authorisation in which a PIP is required to lodge notification with the ISI. (6 marks) Outline the obligations imposed upon the PIP with regard to the maintenance of records to ensure compliance with the terms of their authorisation. (9 marks) [Total: 25 Marks] 4. Carlton, a client, has contacted you for advice. He is insolvent and is considering declaring himself bankrupt. Carlton is aware that other debt management options exist, but thinks that bankruptcy may be the best option for him, given the volume of his debt. However, Carlton is not fully aware of the implications of being adjudicated bankrupt and has contacted you for advice in this regard. REQUIREMENT: Review the main implications of a person being adjudicated bankrupt in the Republic of Ireland, commenting specifically on the following: (a) The effect of a Bankruptcy Order on the debtorʼs assets. (10 marks) (b) The effect of a Bankruptcy Order on the debtorʼs income. (2 marks) (c) The effect of a Bankruptcy Order on the debtorʼs employment. (3 marks) (d) The effect of a Bankruptcy Order on the debtor obtaining credit. (2 marks) (e) The effect of a Bankruptcy Order on certain transactions entered into by the debtor prior to bankruptcy. (3 marks) (f) Any TWO other miscellaneous restrictions or effects upon a bankrupt person. (5 marks) END OF PAPER Page 2 [Total: 25 Marks]
SUGGESTED SOLUTIONS CPA IRELAND, ACCA, CIMA PERSONAL INSOLVENCY PRACTITIONER EXAMINATION - JUNE 2013 SOLUTION 1 (a) Nature of a PIA A Personal Insolvency Arrangement (PIA) is a statutory arrangement between a debtor, who is insolvent and their creditors. It applies in respect of secured and unsecured debt and lasts for 6 years. In terms of secured debt, a maximum threshold of 3 million applies, although this limit can be waived with the consent of creditors (Section 91(4)). There is no maximum threshold for unsecured debts. During the arrangement the debtor pays a sum (agreed through a Personal Insolvency Practitioner (PIP) with the creditors, approved by the Insolvency Service of Ireland (ISI) and the Courts) towards his debts, and at the end of the 6 year period the debtor is discharged from the unsecured debts although he will still have liability on foot of secured debts, which are generally restructured under the terms of the agreement. (0-6 marks) (b) Eligibility for a PIA (Section 91) Based on the information provided Ryder and Anya are eligible for a PIA as they are obviously insolvent (based on their disposable income versus debts due, outlined below). They have both secured and unsecured debt. Their secured debt is less than the 3m threshold. They are domiciled in the State. They have (in the past) engaged with their mortgage provider regarding alternative payment arrangements, and from the information provided they have not accumulated more than 25% of their debt in the past 6 months. Their insolvency is assumed based on the following: (1) Their income is a combined 60,000 per annum and they take home a combined 4,114 per month. (2) If they repay the mortgage, plus the credit union loan this leaves them with disposable income of 1,014 per month (less than the ISI recommended cost of reasonable living expenses for a two person household, no vehicle). (3) Their unsecured debt is 61,000 and their secured debt is 400,000 with a balance of 365,000 outstanding. (4) They also have credit card debt of 23,000 which they need to repay. (0-6 marks) (c) Mandatory elements of a PIA (Section 99) (1) The maximum duration of the agreement must be six years, although this may be extended by up to one year in circumstances as specified in the terms of the arrangement. (2) The PIA must clearly distinguish between secured debts and unsecured debts and must make provision for the manner in which the security held by the creditor is to be treated. Unless the secured creditors agree otherwise, they may get the full value of their security or the full amount of the debt if the property is sold. If the secured creditors agree to accept less than the full value of the security, there is a claw-back if the security is sold for greater than the value estimated at the time of the arrangement. This claw-back provision applies for a period of 20 years. (3) If the debtor complies with the terms of the agreement his remaining debts to unsecured creditors will be discharged on the successful termination of the arrangement. (4) Not all unsecured debts are covered under the terms of the arrangement. Certain debts are excluded and some are excludable. The debtor remains liable for these debts although the arrangement may encompass excludable debts, provided the creditor concerned has consented to this in writing (Section 92). (5) The PIA does not release the debtor from (a) fines or any other monetary penalties arising from criminal offences, (b) debts due under family law orders, (c) debts arising from Court ordered compensation awards resulting from personal injury or death, or (d) or loans obtained through fraud, deceit, misrepresentation or similar wrongdoing. Page 3
(6) The debtor will not be required to sell any assets that are reasonably necessary for his employment or business unless he agrees to such a sale. (7) The debtor must be left with enough income to maintain a reasonable standard of living for himself and his dependants. (8) The arrangement will not require the debtor to dispose of his principal private residence or to cease to occupy it unless specific conditions are met. These conditions include a desire to vacate the property by the debtor or an agreement by the debtor to vacate where the PIP believes that the costs associated with staying in the property are excessive. In these circumstances, any such disposition will be subject to the debtor obtaining independent legal advice and compliance with the provisions of the Family Home Protection Act 1976 or the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010. (9) The arrangement must outline how the debtorʼs debts will be treated in the event of his death or mental incapacity. (10) The arrangement must provide for on-going monitoring and review of the debtors situation by the PIP at regular intervals (not exceeding 12 months) during the currency of the agreement. This review will encompass the preparation of a new Prescribed Financial Statement that must be sent to all the creditors. (11) The arrangement must also specify the circumstances where the PIP is obliged to propose a variation of the PIA in accordance with the terms of the legislation. (12) The PIA must make provision for the costs and outlay (in respect of both obtaining and on-going maintenance) of the PIP including an indication of fees/costs/outlay, how they are calculated, who is responsible for their payment, and the manner in which they are paid. (0-16 marks) (d) Duties and obligations of the debtor throughout the Arrangement (Section 118) (1) The debtor is placed under an obligation to act in good faith in all of his dealings with the PIP and make a full disclosure to the PIP of his assets, income and liabilities and any circumstances that may have a bearing on his application. In particular, he have a duty to ensure that all information provided for the purpose of completing the Prescribed Financial Statement is both accurate and complete. (2) He has a duty to comply with any reasonable request from their PIP to provide assistance, documents and any information deemed necessary including debt, employment, business, social welfare or other financial records. (3) He must inform the PIP if his circumstances change during the lifetime of the arrangement, or of any circumstances that affect his ability to make repayments under the arrangement. These circumstances may include an increase or decrease in the level of the debtorʼs assets, liabilities or income etc. (4) The debtor has a duty not to obtain credit either on his own or with any other person for an amount of more than 650 from any person, without informing that person he is subject to a PIA. (5) He have a duty not to transfer, lease, grant security over, or otherwise dispose of any interest in property above a prescribed value other than in accordance with the terms of the PIA. (6) He have a duty to inform the PIP if he become aware of any inaccuracy or omission in his application or in their Prescribed Financial Statement. (7) He has a duty not to pay to creditors any additional payments separate to the PIA, in respect of debts covered in the PIA. (0-10 marks) (e) Variation of a PIA (Section 119) In order to be valid any variation must be in accordance with the terms of the arrangement, and is subject to obtaining the debtors written consent. Where this consent is unreasonably refused it is open to challenge. Reasonable grounds for refusing consent include: (1) Where the variation requires the debtor to make additional payments in excess of 50% of the increase in his income available after statutory deductions, payments made by him in respect of excluded debts or excludable debts that are not permitted under the terms of the agreement; or (2) Where the variation requires the debtor to make a payment amounting to more than 50% of the value of any property acquired by the debtor after the coming into effect of the PIA, unless receipt of that property had been anticipated by the terms of that arrangement. (0-3 marks) Page 4
Following the debtorʼs consent, to effect the variation the Personal Insolvency practitioner (PIP) must then obtain the consent of the creditors, who are party to the arrangement. The variation must be approved by a 65% majority vote of the total amount of the debtorʼs debts remaining due to the creditors participating in the meeting and voting (subject to 50% approval from unsecured creditors, who are entitled to vote and who have voted, and 50% approval from secured creditors, who are entitled to vote and who have voted). Once approved the variation is binding on the debtor and all creditors entitled to vote (0-4 marks) The creditors must be notified that they are entitled to object to the variation by lodging a notice of objection to the Court within 14 days (0-1 mark) The ISI must also be notified of the variation and the Court must approve the variation. Upon Court approval the PIP and the ISI are notified to this effect Page 5
SOLUTION 2 (a) Features of a Debt Settlement Arrangement (DSA) (1) A Debt Settlement Arrangement (DSA) is a statutory arrangement between a debtor, who is insolvent and their creditors. (2) This arrangement is available to debtors with unsecured debts only (with no maximum threshold on their value), subject to prescribed eligibility requirements. (3) The tenure of the arrangement is normally 5 years, although it can be extended to 6 years in certain circumstances. (4) A DSA can only be obtained once in a lifetime. (5) A DSA must be sought by a PIP on behalf of an eligible debtor, by following a prescribed procedure. (6) The arrangement will provide for the settlement of all outstanding debts covered by the terms of the arrangement. (7) During the tenure of the arrangement (and in the context of the debts covered by the arrangement) the debtor and their assets will be immune from legal proceedings and other actions which could otherwise be taken by unsecured creditors. (8) On termination, the arrangement will provide for the discharge of all outstanding debts covered by the terms of the arrangement. (9) During the lifetime of the arrangement details of the arrangement will be recorded on a public Register. (10) On termination the public Register will be updated to reflect this fact. (any 8 x 1.5 = 0-12 marks) (b) Change in circumstances during the tenure of the DRN Section 1: In this situation Riley has two options: (1) In accordance with Section 36 of the Act if the debtorʼs material circumstances change during the tenure of the Debt Relief Notice (DRN) the debtor must inform the ISI. For the purpose of the legislation a material change is defined as (1) a net income increase of 400 or more per month; or (2) the receipt of a gift or sum of 500 or more. In both instances the debtor is obligated to submit 50% to Insolvency Service Ireland (ISI) for distribution to creditors. (0-4 marks) However, this is not an appropriate option for Riley, as the lottery win is valued at 100,000 and the value of his permissible debt under the DRN is valued at 16,700, therefore there would be no justification for him handing over 50,000 (50% of the gain) of his winnings to pay a 16,700 debt. (0-1 mark) (2) The more appropriate course of action is detailed in Section 37 of the Act, which states that a debtor subject to a DRN can effectively buy himself off the Register of DRNʼs where he makes repayments totalling not less than 50% of the value of the debts specified in the DRN (0-2.5 marks) Section 2: Procedures that should be adopted and their effect If Riley makes this payment through his Approved Intermediatery (AI) to the ISI it will distribute the monies received within one month to all qualifying specified debts of the DRN on a pari passu basis (Section 38). (0-1 mark) If this occurs then the DRN will no longer have legal effect, and the ISI should remove the debtors name and details from the Register of DRNs within a maximum period of 3 months. Thereafter, the debtor is discharged from all debts specified in the DRN, as well as any interest or penalties applicable to those debts (Section 46). If Riley decides to proceed in this manner he will be issued with Debt Relief Certificate (DRC) by the ISI confirming that he has been discharged from the relevant debts. The ISI will also write to all of Rileyʼs the creditors, informing them that the DRN has been removed from the Register (Section 46(2)(a)-(c)). Page 6 (0-2.5 marks)
SOLUTION 3 (a) The Insolvency Service of Irelandʼs Supervisory Role of Personal Insolvency Practitioneerʼs (PIPʼs) The aim of the supervision process is to protect the integrity of the role of the PIP and to ensure that the service delivered to debtors and creditors is to a high standard, and in compliance with the legislation. Amongst other matters, the supervision process seeks to ensure that the PIP is complying with their authorisation obligations in relation to: (1) the continued maintenance of professional indemnity insurance, (2) the maintenance of proper records of their activities in relation to debtors, (3) the charging of fees, (4) the regulation of advertising, (5) the maintenance of a sufficient disaster-recovery process, (6) the regulations and standards established by the ISI regarding (a) fitness and probity, (b) independence, (c) competence and capability, (d) honesty, ethics and integrity, (e) financial soundness, (g) the practitioners relationship with the insolvency service, (h) organisation and management, (i) outsourcing, and (j) complaints handling, (7) the safeguarding of debtor funds, and (8) the maintenance proper financial systems and controls. In particular, the ISI will also monitor areas such as complaints. (0-4 marks) As part of this supervision the following statements and reports must be submitted to the ISI on request: (1) Analysis and assessment of returns and information supplied by a PIP to the ISI; (2) On-site visits by inspectors appointed by the ISI to the offices of the PIP; and/or (3) Assessment of publicly available information about the PIP (0-3 marks) In cases of possible non-compliance, the ISI may carry out an enquiry or appoint investigators under the Personal Insolvency Act 2012. The ISI may also seek suspension, revocation of the authorisation of the PIP or other measures (including the imposition of reprimands or fines) which may be necessary in accordance with the Personal Insolvency Act 2012. (0-3 marks) (b) Notification Obligations A practitioner is required to lodge a notification with the ISI in the following situations: (1) When a breach has taken place under the terms of the legislation or any regulations enacted under the terms of the legislation; (2) Upon the commencement of any significant legal proceedings by or against the PIP, including details of the other party or parties to such proceedings; (3) On the occurrences of any event which significantly impacts, or has the potential to significantly impact the practice of the PIP and his ability to perform the functions under the legislation; or (4) When there is any change to the practitioners name or business name, business address, telephone number or any other contact details. (any 3 x 2 = 0-6 marks) (c) Record Keeping All PIPs are required to maintain proper, up to date, accurate and complete records for at least six years after the completion of each Debt Settlement Arrangement (DSA) or Persnal Insolvecy Arrangement (PIA) in respect of which they were appointed. A non-exhaustive list of such records include: (1) Records identifying all debtors and creditors who are, or may become, or were subject to or covered by a DSA or PIA; (2) Records of all communications with debtors and creditors who are, or may become, or were subject to or covered by a DSA or PIA and other persons concerned in preparing or administering these arrangements; (3) A copy of each debtorʼs Prescribed Financial Statement; (4) Records of all transactions entered into on behalf of debtors and creditors who are or may become subject to or covered by a DSA or PSA; Page 7
(5) Records of all fees and charges charged for performing their functions as a practitioner in accordance with the terms of the legislation, including details of outlays recovered, together with documentation evidencing that the fees and charges were properly due to the personal insolvency practitioner; (6) Minutes or any other record of a creditorsʼ meeting; (7) Records of complaints handling procedures and records evidencing details of complaints received together with their outcome; and (8) All other records as may be required to be maintained under the legislation. (any 6 = 0.6 marks) All records of the PIP must be kept in the State and must be made available to the ISI on request. (0-1 mark) Page 8
SOLUTION 4 The following is an overview of the effect of an adjudication of bankruptcy: (1) Effect on Assets: All the debtorʼs assets and property as of the date that they were adjudicated bankrupt will vest automatically in the Official Assignee. These assets with the exception of (1) the private residential property/family home of the bankrupt and (2) necessities up to a value of 3,100 (including clothing, furniture, tools and equipment, as well as any other relevant necessities), are transferred to the Official Assignee (under the supervision of the Court), who will sell them. Upon sale the Official Assignee will use the proceeds to pay costs, expenses, fees and certain priority debts (such as taxes) and will then distribute the remainder among the bankruptsʼ creditors. In accordance with the provisions of the EU Insolvency Regulations 2002 the power of the Official Assignee to realise the value of property applies to both property owned within and outside the Irish State. (0-5 marks) Any assets acquired by the bankrupt person thereafter (such as a gift, lottery win or inheritance) must be disclosed to the Official Assignee and may also be claimed by them and sold for the benefit of the creditors. In relation to the family home the Official Assignee may only sell it with the prior permission of the Court. In making its determination as to whether or not the property should be sold, the Court will balance the interests of the bankruptʼs creditors against the interests of the bankrupt and his family and may decide to postpone the sale until a later date. Non-disclosure or concealment of property by the bankrupt to the Court or the Official Assignee is a criminal offence. (0-1 mark) (2) Effect on Income: The court can use a bankruptʼs salary and/or pension for the benefit of his creditors, subject to providing the bankrupt person with reasonable cost of living expenses. No deductions will be made from social welfare payments. (3) Effect on Employment: Where a person is declared bankrupt there are restrictions upon certain employment. A bankrupt person cannot be an officer of a company, a partner in a partnership, a solicitor or accountant, and he cannot hold the office of an elected representative. This includes local authorities, the Dáil and the Seanad. In addition, a bankrupt is no longer eligible to hold certain senior positions within the civil service. (0-3 marks) (4) Effect on Credit: A person adjudicated bankrupt is prohibited from obtaining credit over 650 without disclosing his status as a bankrupt person. Non-disclosure is an offence. (5) Effect on transactions prior to bankruptcy: Any payment or any transfer of property by the bankrupt to a creditor in preference over other creditors that took place in the 1 year period prior to being adjudicated bankrupt may be deemed a fraudulent preference and may be undone or otherwise dealt with by the Court. (0-1.5 marks) In addition, any sale of property at an under value that the bankrupt carried out in the one year period prior to being adjudicated bankrupt may be avoided and undone by the Official Assignee. (0-1.5 marks) Page 9
(6) Miscellaneous Restrictions/Effects: A. In addition, a bankrupt person is only allowed to travel outside the State, subject to notifying the Official Assignee. The bankrupt person may be arrested if the High Court believes that he is leaving the State in order to avoid the consequences of the Bankruptcy Order. B. Where a bankrupt person holds a general power of attorney on behalf of someone else, it is automatically revoked upon the declaration of bankruptcy. C. Certain items of the bankruptʼs post may be re-directed to the Official Assignee. D. When a person is declared bankrupt he is required to lodge an initial 650 towards the costs of the Official Assignee and towards court and advertisement costs. E. Details of the person adjudicated bankrupt will be maintained on a bankruptcy register in the Office of the Examiner of the High Court, for the entire tenure of the Bankruptcy Order (this will be for a period of 3 years (subject to extension), once Part 4 of the Personal Insolvency Act 2012 is commenced). (any 2 x 2.5 = 0-5 marks) Page 10