The long awaited Personal Insolvency Bill (the "Bill") was published on Friday, 29 June 2012 and provides for significant changes to the personal insolvency regime in Ireland. However, it does not differ greatly from the general framework for personal insolvency reform published earlier this year. Some key points are as follows:
- The period for automatic discharge from bankruptcy is to be reduced from twelve to three years
- Bankruptcy will only be available where a debtor's liabilities are over €20,000
- An independent body known as the Insolvency Service is to be established, which will oversee three new debt settlement mechanisms contained in the Bill: (1) Debt Relief Notices, (2) Debt Settlement Arrangements and (3) Personal Insolvency Arrangements
The reduction in the bankruptcy period from 12 years to three years (subject to court discretion to order the making of payments to creditors from a discharged bankrupt's income for a period lasting up to five years from the date of the discharge) is a significant change.
However, given the possibility of orders in respect of a bankrupt's income being made for a further five-year period, it is not clear whether this provision will be sufficient to affect the trend whereby insolvent individuals are moving their centres of main interests (COMI) to the United Kingdom to avail of the possibility of discharge from bankruptcy after one year.
The proposed debt settlement mechanisms, which are designed to offer an alternative to bankruptcy for individuals in certain prescribed circumstances, are summarised below.
Debt Relief Notice (DRN)
An insolvent individual with unsecured debts of €20,000 or less and very limited means (eligibility criteria include having a net disposable income of €60 or less a month, having assets of €400 or less, and having no likelihood of becoming solvent within a period of 5 years) may apply, through an approved intermediary, to the Insolvency Service for a Debt Relief Notice ("DRN"). Once the Insolvency Service is satisfied that the application is in order, it will issue a certificate to that effect, and furnish the certificate and the application with supporting documentation to the Circuit Court, which, if satisfied that the appropriate criteria have been satisfied, will issue a DRN. A DRN will provide a three-year "protection period" during which creditors cannot pursue the debtor in respect of debts specified in the DRN. If the debtor is unable to pay the debt at the end of the protection period, the debt will be written off, but provision has also been made for a debtor to be removed from the Register of Debt Relief Notices during the protection period if a repayment of at least 50% of the value of the specified debts is made to the Insolvency Service.
Debt Settlement Arrangement (DSA)
A Debt Settlement Arrangement ("DSA") system is proposed to enable an insolvent individual with unsecured debts to make settlement proposals through a Personal Insolvency Practitioner ("PIP") to one or more creditors for payment of debt over a period of five years (with a possible extension to six years). It had been proposed that this would apply to unsecured debts in excess of €20,000, but this threshold has not been included in the Bill. If the proposal is approved by at least 65% in value of creditors voting at a creditors' meeting, and is subsequently approved by the appropriate court on notification by the PIP (i.e. the Circuit Court if the total liabilities of the debtor are less than €2.5m, or otherwise, the High Court), it will become binding on all creditors and will be registered by the Insolvency Service.
Personal Insolvency Arrangement (PIA)
A personal insolvency arrangement ("PIA") will allow for settlement of both secured and unsecured debt by an insolvent individual over a six-year period (with a possible extension to seven years), provided that at least one creditor involved is a secured creditor and the aggregate secured debts do not exceed €3 million (unless all secured creditors agree to waive this limit). A PIA must be approved at a creditors' meeting by at least 65% in value of actual votes cast at the meeting as a whole (whether secured or unsecured creditors) and by (i) more than 50% of secured creditors and (ii) more than 50% of unsecured creditors, and subsequently approved by the appropriate court on notification by the PIP, before it will become binding on all creditors.
A PIP acting on behalf of a debtor may, whilst in the process of preparing an application for a DSA or a PIA, apply to the Insolvency Service for "a protective certificate". If approved and issued by the appropriate court, this will provide a period of seventy days protection (extendable by a further forty days in certain circumstances) during which time certain enforcement proceedings or bankruptcy proceedings may not be initiated or continued against the debtor or his / her property, except with the leave of the court.
Failure by a debtor and his / her creditors to agree to a suitable non-judicial debt settlement leaves open the option of debt enforcement or judicial bankruptcy. Furthermore, a creditor may challenge the issuance of a DRN, DSA, PIA or a protective certificate by way of an application to the appropriate court.
Insofar as secured creditors are concerned, it is important to note that only a PIA has the potential to deal with secured debt and the principal owed to the secured creditor cannot be written down to less than the value of the security. Certain protections have been given to secured creditors including a "claw-back" in the event of a subsequent sale of a mortgaged property where the mortgage has been written down.
A PIA cannot include a requirement that a debtor cease to occupy or dispose of his / her principal private residence unless the debtor agrees to such a proposal, or if the PIP, having discussed the issue with the debtor, forms the opinion that the costs of the debtor continuing to reside there are disproportionately large bearing in mind his / her financial circumstances. The protections afforded under the Central Bank Code of Conduct on Mortgage Arrears will continue to be available to cooperating borrowers.
Although the Bill makes it unlikely that secured lenders will, in many circumstances, be compelled to accept a write-down of their debt, the PIA offers debtors a formal process through which they can apply. The three new settlement options are likely to be beneficial mechanisms for dealing with personal insolvency outside of the bankruptcy process, and will allow qualifying insolvent individuals to deal with their debts in a structured manner. It is envisaged that the Bill will be passed into law by mid-November 2012.
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.