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New Personal Insolvency Legislation Intended for Ireland

Against a backdrop of a national recession andunprecedented liquidity and solvency crises in itsbanking system, Ireland obtained financialsupport from the International Monetary Fundand the European Union. It was a condition ofthe provision of financial support that, amongother measures, reform of the personalinsolvency laws in Ireland be initiated and

implemented.

It is clear that the current bankruptcy regime isinadequate for the changing demands of Irishsociety. In particular, there is no legislativemechanism for non-judicial debt settlement.Further, the period for which a debtor remains abankrupt is 12 years, unless all costs andpreferential claimshave been paid in which casea bankrupt may apply to the High Court to bedischarged from bankruptcy after 5 years.

The pressing need to create effective solutions

for the management of personal debt in Irelandthrough non-judicial means has beencomplicated by the level of negative equityaffecting many mortgage holders. Many securedloans contain significant amounts of unsecureddebt as a result of the negative equityprecipitated by falling property values in Ireland(in both the residential and commercial sectors).Therefore, assessing the viability of enforcementoptions and bankruptcy proceedings, as againstconsensual restructuring or debt settlement, hasbeen, and undoubtedly will continue to be, a

challenge for lenders seeking recovery of theirdebts.

The inadequacy of our personal insolvency lawsis highlighted by the fact that Irelands nearestneighbour, the United Kingdom, provides fornon-judicial debt settlements (in the form ofIndividual Voluntary Arrangements) and a much

shorter period for bankruptcy, which can, incertain circumstances, be as little as 12 months.

Personal Insolvency Bill

On 25 January 2012, the Irish Governmentpublished the heads of a new PersonalInsolvency Bill for Ireland (the Draft Bill).

The Draft Bill incorporates many of the findingsand suggested strategies of earlier reports onthe topic (namely the 2010 Report of the LawReform Commission on Personal DebtManagement and Debt Enforcement and the2011 Report by the Inter-Departmental MortgageArrears Working Group).

Interested parties have been invited to submitcommentary on and suggested amendments tothe Draft Bill. It is likely that the Draft Bill, whenfinalised, will look considerably different, but it is

worthwhile broadly outlining how Irelandproposes legislating for personal insolvency.

The next step in the legislative process is for theDraft Bill to be agreed and then published. Onceit is published, it will go to the Oireachtas (theIrish national parliament) for debate and for avote. It is our understanding that the drafting andpublication of the personal insolvency legislationis being expedited and we expect the legislationto be in place before the end of 2012.

Proposals for Reform the key changesenvisaged by the Personal Insolvency Bill

The Draft Bill provides for the establishment ofan independent body called the InsolvencyService, the principal functions of which wouldbe the management of the non-judicial personalinsolvency system, as provided for in the Draft


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Bill, and to maintain a newly-formed PersonalInsolvency Register.

The Draft Bill introduces three new non-judicial

debt settlement systems, which are:

1. Debt Relief Certificates;

2. Debt Settlement Arrangements; and

3. Personal Insolvency Arrangements.

With regard to the bankruptcy laws, the Draft Billproposes the automatic discharge of a bankruptfrom bankruptcy, subject to certain conditions,after 3 years.

Debt Relief Certificates

A debt relief certificate (DRC) provides for theforgiveness of debt for debtors who satisfycertain eligibility criteria.

In order to apply and be eligible for a DRC, adebtor must make an application to theInsolvency Service through an approvedintermediary and have qualifying debts (asdefined by the Draft Bill) of 20,001 or less.

Secured debt is not a Qualifying Debt for thepurposes of a DRC and therefore will not beaffected by the granting of a DRC.

Debt Settlement Arrangements

A debt settlement arrangement (DSA) is asettlement with creditors which, provided thedebtor satisfies the eligibility criteria, will result ina debtors unsecured creditors being paid orsatisfied in part or in full.

This arrangement shall not affect the rights of a

secured creditor.

A DSA shall only be proposed on behalf of adebtor through a personal insolvency trusteeand may only be proposed once in a 10 yearperiod by the same debtor.

In order to apply and be eligible for a DSA, adebtor must have liabilities of 20,001 or more.

As an interim protective measure, a debtor may

make an application to the Insolvency Servicefor a certificate to prevent enforcement inrespect of any personal debt owed by him or herwhile proposals are with the Insolvency Servicefor determination.

Before a DSA is granted to a debtor, it must beapproved by a majority of 65% in value ofunsecured creditors at a meeting of creditors.

The maximum duration of the DSA shall be 72months, if agreed by the creditors, and if not,then the duration shall be 60 months.

Personal Insolvency Arrangements

The purpose of a personal insolvencyarrangement (PIA) is stated to find a solution tothe serious and continuing disruption to societyand the economy in Ireland as a result of thewidespread insolvency amongst debtors withsecured debt and to provide for a realisticalternative to bankruptcy.

It is proposed that the maximum duration of the

period within which the obligations of a PIA areto be performed shall be 72 months, but a PIAmay provide for an extension of this period forup to a further 12 months in circumstancesspecified in the terms of the PIA.

A debtor shall only be eligible to benefit from aPIA provided that the eligibility criteria are met,one of which is that the debtors liabilities are inexcess of 20,001, but do not exceed3,000,000.

A PIA can apply to and effect secured debt and

secured creditors that hold security over adebtors asset in Ireland.

A proposal for a PIA shall be formulated andproposed on behalf of the debtor by a personalinsolvency trustee.


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As above, a debtor who applies for a PIA maymake an application to the Insolvency Servicefor a certificate to prevent the enforcement ofany personal debt whilst proposals are being

considered.

Valuation of Security

The valuation of security in respect of securedcredit for the purposes of a PIA shall bedetermined by agreement between the debtor(acting through the personal insolvency trustee)and the relevant secured creditor. In theabsence of agreement as to the value of thesecurity, the debtor (acting through the personalinsolvency trustee) and the relevant securedcreditor shall, appoint an appropriateindependent person to value the security andthat valuation shall be used by the personalinsolvency trustee for the purposes of preparingthe proposal for a PIA.

Creditors Meetings

It is proposed that before a PIA will becomebinding, it must be approved at a creditorsmeeting. The Draft Bill provides that a proposedPIA will have to be approved by a majority of75% of secured creditors and 55% of unsecured

creditors.

However, the Draft Bill does not confirm whetheror not all secured creditors will have equal votingrights. For example, it is unclear whether it isintended that a subordinated creditor will haveequal voting rights to a creditor holding a firstfixed charge?

Amendments to the Bankruptcy legislation

The Draft Bill proposes that the threshold for theissuance of a bankruptcy summons be raised

and that a summons should only issue against adebtor who owes a liquidated debt which is inexcess of 20,001. As it stands, a bankruptcysummons may be issued when a debtor hascommitted an act of bankruptcy and owes aliquidated debt of 1,800 or more.

It is envisaged that a court, in deciding whetheror not be make an order for costs in respect ofthe bankruptcy proceedings, may have regard towhether the applicant creditor had refused to

accept an appropriate settlement orarrangement, namely a DSA or PIA which hasbeen proposed by or on behalf of the debtor.

The principal proposed amendment to thebankruptcy legislation is that every bankruptcyshall automatically terminate after three years.However, the bankruptcy official assigned to thebankrupt shall be entitled to apply to the court(on his own motion or pursuant to a request froma creditor) to object to the automatic dischargeof a person from bankruptcy on the grounds thatthe bankrupt has acted in a manner that wasdishonest, uncooperative or wrongful. In thesecircumstances it is proposed that the court willhave jurisdiction to extend the period ofbankruptcy for a maximum period of 8 years.

The Draft Bill provides that the reduced periodfor automatic discharge will also apply to existingbankrupts.

If the bankrupt has any unrealised property atthe date of termination of the bankruptcy, it willremain vested in the bankruptcy official.

Another important proposal is that the court shallhave the discretion, taking into accountreasonable living expenses, to make an orderrequiring a discharged bankrupt to makepayments from his or her income to thebankruptcy official or a creditor for a period of upto 5 years after the date of discharge of thebankruptcy.

What does the Draft Bill mean for securedcreditors?

The Draft Bill has the capacity to cause afundamental shift in the dynamic of arelationship and/or the negotiations betweenmortgage holders and mortgage lenders. If theterms of a proposed PIA are not acceptable to asecured creditor, the debtor may apply to havehimself or herself adjudicated bankrupt, and


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potentially be discharged from bankruptcy after 3years.

If the banks are required to write down secured

debt, it is likely to have a detrimental effect ontheir balance sheets which could negativelyaffect the recent inroads made by the banks inattracting investment.

Interestingly, in the United Kingdom IndividualVoluntary Arrangements do not permit thewriting down of secured debt.

Write-downs of household mortgages, combinedwith the current level of mortgage defaults, couldamplify banks losses which would haveramifications for the Residential MortgageBacked Securities (RMBS) market in Ireland.

The writing down of mortgages could also havethe effect of discouraging compliant mortgage

holders, who are concerned about the level oftheir debt, from meeting their arrears. Anincrease in the level of defaults would have adetrimental effect on Irish RMBS.

Further, compulsory write downs under the PIAmay make other initiatives such as processesunder the Code of Conduct on Mortgage Arrearsredundant, as debtors may seek to have theirsecured debts written down as opposed torestructured.

May 2012 Maples and Calder

This update is intended to provide only general information forthe clients and professional contacts of Maples and Calder. It

does not purport to be comprehensive or to render legal advice.

Should you wish to unsubscribe from future mailings pleaseemail us via [email protected].

irish new personal insolvency legislation intended for ireland_01.pdf

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