It is anticipated that a number of significant non-performing loan (NPL) portfolios will be divested by banks operating in the Irish market over the coming year. The likely cost and timing of realising security over secured real estate assets is a significant consideration for potential buyers of NPL portfolios when assessing entry into this market and the pricing of proposed bids. In light of the additional issues that generally arise in the context of enforcement over residential real estate assets, an understanding of the potential issues in relation to enforcement is even more critical for owners and potential buyers of NPL portfolios comprising residential property.
This note is intended to provide a useful overview of recent cases and developments in this area, with a particular focus on issues which are of relevance to both home loans and loans secured over buy-to-let residential properties.
Recent Developments in relation to the Enforcement of Security
1. Personal Insolvency Arrangements
Under the personal insolvency regime, debtors may apply for a Personal Insolvency Arrangement (PIA) in respect of debts of up to €3 million (which must include some element of secured debt) and, if approved by the Court, the terms of the PIA are imposed on the relevant secured creditor or owner of the secured debt. As the personal insolvency legislation1 was designed to help debtors remain in their homes, in cases where the relevant debt is secured by a principal private residence, the Courts must give weight to proposals which would allow the debtor to stay in their home, provided that it is satisfied that the proposed PIA would not be unfairly prejudicial to any of the interested parties.
The following two recent decisions are of particular interest in showing the approach that the Courts are likely to take when considering the impact of PIAs on the interests of secured lenders.
The 2017 decision in Re Callaghan (A Debtor)2 has confirmed that "warehousing" of debt is not precluded by the personal insolvency legislation and is an alternative that may be validly proposed by creditors. However, the case also made clear that such proposals are only reasonable if they are sustainable and based on an anticipated ability to ultimately repay the warehoused amount.
In this case, a debtor couple's proposed PIA involved a large write-down of the debt secured on their principal private residence. On the other hand, the secured creditor, KBC, proposed instead to write off only a small proportion of the debt and then split the secured debt evenly into two equal portions, with one portion to be serviced with certain specified repayments by the debtors and the other portion to be placed in a "warehouse" account bearing 0% interest. Under KBC's proposal, it would only be permitted to enforce its security in respect of this warehoused debt after the survivor of the debtor couple had died. KBC's counterproposal would thus have provided security of tenure for the debtors, while reserving KBC's right to recover the vast majority of the original secured debt at the end of the term.
The Court held that the debtors' proposed PIA provided a better resolution, on the basis that KBC's proposal was not predicated on an ability to repay and was capable of creating insolvency for the debtor's estate at the end of the term. A positive aspect of the decision, from the perspective of lenders or holders of NPL loans, is that the Court rejected the debtors' argument that warehousing of the debt beyond the term of the PIA was not permitted under the regime. However, the decision indicates that, in order to be approved by the Court, a warehousing proposal must offer a solution to indebtedness that is likely to be achieved.
Given that there was no expectation that the debtors would ultimately be able to pay the warehoused amount, the KBC proposal was not considered reasonable or fair to the debtors. Since a PIA is a once in a lifetime solution, and the KBC proposal could result in insolvency in the future, it was considered to be against the statutory scheme.
(Please see our more detailed case summary at the following link: Re Callaghan)
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.