A bank has recently successfully challenged the coming into effect of a debt settlement arrangement ("DSA") on grounds that inaccuracies existed in the debtor's statement of affairs such that its approval would cause material detriment and prejudice to his creditors.

The debtor owed ACC Loan Management Limited (formerly ACC Bank plc) (the "Bank") the sum of €250,000 pursuant to a guarantee executed in 2004 and sought the protection of the Circuit Court in order to allow him to make a proposal for a DSA with his creditors pursuant to the provisions of the Personal Insolvency Act 2012 (as amended).  The proposal put forward at the creditors' meeting was that the unsecured creditors of the debtor would receive a dividend of 2.52% in full and final settlement of their claims.  At the creditors' meeting the Bank and another creditor (ADM Londis plc) voted against the proposal for a DSA.  However, the DSA was approved by the requisite majority in value of the debtor's creditors. 

Following the meeting the Bank lodged a notice of objection to the coming into effect of the DSA.  The Bank challenged the DSA on two grounds:

  • That a material inaccuracy existed in the debtor's statement of affairs (based on the prescribed financial statement) which caused a material detriment to his creditors; and
  • That the DSA unfairly prejudiced the interests of a creditor.

The Bank had concerns with the manner in which the debtor had conducted his affairs over the previous four to five years in light of the fact that a significant number of the assets that had appeared in a statement of affairs furnished by the debtor to the Bank in 2009 no longer appeared in the prescribed financial statement which had been prepared by the debtor and it was evident that the majority of these assets had been transferred to the debtor's wife.  In addition, two Brazilian creditors of significant value had voted in favour of the DSA, but the basis upon which these entities had a legally enforceable liability against the debtor was not clear from the documentation that had been furnished.

At the objections hearing, the cross-examination of the debtor exposed a vast number of inaccuracies and inconsistencies.  The court upheld the objections and concluded that there would be a material detriment to all of the debtor's creditors as a result of the inaccuracies and inconsistencies which emerged from the challenge to the debtor's DSA in that, if the DSA was approved, the debtor's creditors would be prevented from taking further steps to properly examine the affairs of the debtor and certain transactions that had taken place over the previous number of years.

This case highlights that if a creditor has suspicions that a debtor has not been fully upfront in respect of his assets and in adhering to the prescribed requirements, the creditor should consider challenging the DSA where its concerns are not adequately addressed.  Given the significant write-downs which can be imposed on creditors pursuant to a DSA, it is encouraging that the courts will require that debtors act in good faith in availing of the relevant statutory provisions.

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