On 30 August 2010, the Government approved the publication of the Civil Law (Miscellaneous Provisions) Bill 2010 (the "Bill"). Amongst other amendments, the Bill provides for changes to the law relating to bankruptcy in Ireland. Part 7 of the Bill proposes to amend the Bankruptcy Act 1988 ("BA 1988") by reducing the period of time before which a bankrupt can apply to court to be discharged from bankruptcy from 12 years to 6 years (subject to existing conditions in the law also being met). The Bill also provides for the automatic discharge of bankruptcies existing for 20 or more years.

If enacted, these amendments would represent what is arguably the most significant change to the area of personal insolvency law in Ireland in the last twenty years. In a country where fewer than 50 people were declared bankrupt between 2005 and 2009, it is clear that something in the judicial process is not working. The legislation, in its correct form, has discouraged debtors and creditors alike from using the bankruptcy system in place.

This briefing examines the current legal position both in Ireland and in other jurisdictions in relation to personal insolvency, the problems which have arisen in this area and the potential solutions to these problems.

1. Current Law

It must be remembered that the key objective of bankruptcy law is to ensure that the assets of a debtor can be realised and distributed amongst his creditors in a fair and equitable manner whilst also providing some form of protection for the debtor's future income and his ability to make a living after being discharged from bankruptcy.

At present, the law of bankruptcy in Ireland is predominantly a creature of statute and is governed by the BA 1988 and Order 76 of the Rules of the Superior Court.

The BA 1988 overwhelmingly favours the rights of a creditor over the rights of the debtor and as a result, the consequences of being adjudicated bankrupt are extremely onerous. Some notable effects of being adjudicated bankrupt are that:-

  • all the debtor's assets and property automatically vest in the Official Assignee;
  • the bankrupt must disclose any property acquired after being adjudicated bankrupt and this vests in the Official Assignee; 
  • it is an offence for the bankrupt to act as an officer of any Irish company or even of any foreign company which has an established place of business in Ireland and to also take part or be concerned in the management of such a company without leave of the court; 
  • the bankrupt cannot obtain credit over €630 without disclosing his status as a bankrupt; 
  • the bankrupt's salary is likely to be attached in favour of the Official Assignee; and 
  • the bankruptcy may be discharged after twelve years (provided that all other requirements have been met).

Bankruptcy proceedings do not always result in a satisfactory payment of debts and the length of time it takes to realise assets and distribute them, coupled with the heavy costs involved, would discourage all but the most determined creditors from following any bankruptcy proceedings through to their conclusion. Instead, bankruptcy proceedings are often initiated by a creditor as a means of 'prompting' a debtor into paying.

In most cases, it simply does not make sense to petition to have a debtor adjudicated bankrupt or for the debtor himself to petition to be adjudicated bankrupt under the Irish bankruptcy system. Instead, it is far more practical for a debtor to try and come to a private agreement with his creditors either under the control of the court or outside the court.

Despite the inefficiency of this process, it should be noted that all constitutional challenges to the BA 1988 have failed to date. In Grace v Ireland it was held that despite the plaintiff having been adjudicated bankrupt in 1991, a period of bankruptcy of over 15 years was held not to be excessive in duration in circumstances where other options to obtain discharge were open to the plaintiff.

2. Comparison to Other Jurisdictions

In stark contrast to the bankruptcy system in Ireland, in the UK a bankruptcy can end after only 12 months. Also, there are a number of debtor friendly procedures that allow a debtor in the UK to avoid being made bankrupt. The introduction of the Enterprise Act 2002 which came into force in the UK in April 2004 helped streamline the bankruptcy process so that the usual term for bankruptcy was reduced from 2-3 years down to 12 months.

As a result, the number of people made bankrupt in the UK has risen dramatically. For the first half of 2010 alone, over 70,000 bankruptcies were recorded in England and Wales. In contrast in Ireland, there were only 17 recorded bankrupts during the same period.

In the U.S., discharge from bankruptcy has been traditionally seen as the legal embodiment of the idea of a 'fresh start'. Walt Disney and Donald Trump are just a couple of examples of bankrupts in the U.S. who have benefited from the efficient bankruptcy system in place. Nowadays, a debtor can be discharged from a Chapter 7 (Title 11, U.S.C) bankruptcy, which is the most common form of bankruptcy in the U.S, within 6 months.

3. In Search of a Solution

In September 2009, the Law Reform Commission ("LRC") published a 420 page consultation paper entitled 'Personal Debt Management and Debt Enforcement'. In this report, the LRC provisionally recommended that the Bankruptcy Act 1988 should be amended significantly to ensure that it provides an adequate and effective system of personal insolvency law. It is also recommended that a two-tiered system should exist whereby a statutory non-court based settlement scheme would supplement the court based scheme included in the BA 1988. Judicial bankruptcy would remain an option if non-judicial procedures were inappropriate.

In May of this year, the LRC published its interim report, which included a 14-point action plan to reform the law on personal debt. In this interim report, the LRC recommended a reduction in the 12 year waiting period for a discharge application under section 85(4)(c) BA 1988. However, the Commission was quick to admit that such a change was a 'relatively modest adjustment' only.

Elsewhere, commentators and critics of the Irish bankruptcy system have been suggesting that some of the following amendments could be implemented:-

  • some form of a distinction between the legal treatment of fraudulent bankrupts and non-fraudulent bankrupts as recently introduced in Greece. If applied in Ireland, this would allow non-fraudulent bankrupts to avoid some of the more draconian consequences of bankruptcy while also providing for quicker periods of discharge; 
  • where the debt owed is relatively small, a form of the Debt Relief Order which exists in the UK could be introduced. Under this procedure, where judgment is obtained against a debtor, a debtor would have the right to a form of Debt Relief Order which would put a stay on any creditor action for a limited period during which time, any unsecured creditors could prove their claims to a body like the Small Claims Registrar of the District Court. On receipt of this report, the District Court Judge could then make a Single Instalment Order for the payment of monies to the Registrar which could be distributed on a parri passu basis to all of the creditors who made claims ; 
  • the introduction of a system which is similar to the Individual Voluntary Arrangement system which exists in the UK as this could be used as a formal alternative to bankruptcy. Under this system, an Insolvency Practitioner determines the assets and liabilities of the debtor and proposes a scheme of arrangement to this creditors at a creditors' meeting. If the proposal is accepted by over 75% in value of the debtor's creditors it would become binding on all of the creditors. The debtor would also be able to apply to court for a stay of enforcement prior to the creditors' meeting ; and 
  • to provide for the appointment by the court of a 'Receiver Manager and Assignee in Bankruptcy' who would act under the supervision of the Official Assignee and would enjoy various powers as delegated by the court. This would improve the bankruptcy process by ensuring that the estates of bankrupts are realised as efficiently and speedily as possible.

4. The Civil Law (Miscellaneous Provisions) Bill 2010

Part 7 of the Bill provides for the amendment and substitution of section 85 of the BA 1988 including:-

  • a reduction in the period of time before which a bankrupt can apply to the Court to be discharged from bankruptcy from 12 years to 6 years provided the estate of the bankrupt has been fully realised, the bankrupt can pay the expenses of the Official Assignee, the costs of the Petitioning Creditor and any preferential creditors have been paid; and 
  • for the automatic discharge of bankruptcies on the twentieth anniversary of the adjudication order.

Although the Minister for Justice and Law Reform, Mr. Dermot Ahern, T.D. has used this Bill as an opportunity to make some early improvements to the law on bankruptcy, it seems that long term reform in this area will have to wait until the end of this year when the LRC publishes its Final report on 'Personal Debt Management and Debt Enforcement'.

5. Conclusion

The reality is that the BA 1988 is currently seen as a creditor's enforcement mechanism of last resort. However, this view needs to be aligned with other jurisdictions such as in the U.K. and U.S. where personal insolvency is used as the first port of call for both the realisation and equality of distribution of a debtor's assets and to protect debtors and to help to rehabilitate them on both an economic and social level.

Although welcome, the amendments introduced by the Bill should be seen as the first step on a very long road towards the transformation of personal insolvency in Ireland. Under the Recommendation of the Committee of Ministers to Member States on legal solutions to debt problems, we are still falling short of our commitments to reduce the stigma of business failure while promoting the benefits of entrepreneurship.

It is clear that the current system needs immediate reform as the levels of personal debt are still on the rise. We will have to wait and see if the LRC's final report can begin to implement some of these overdue changes and help solve the intractable problems of personal insolvency in Ireland.

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