Ireland: New Court Review Process Available For Rejected Personal Insolvency Proposals

The Personal Insolvency (Amendment) Act 2015 was signed into law on 28 July 2015. The new Act will give the Irish Courts the ability to overturn a secured creditor's decision to reject a borrower's proposal for a Personal Insolvency Arrangement (PIA) under the Personal Insolvency Act 2012 (the 2012 Act).

The new Act follows the Government's announcement on 13 May 2015 of a series of measures intended to further assist those in mortgage arrears. This briefing summarises the new Act and discusses its potential implications.

KEY LINKS

GENERAL BACKGROUND

The 2012 Act was signed into law on 26 December 2012. It reformed the Bankruptcy Act 1988 and introduced three mechanisms for non-judicial debt settlement: the debt relief notice (DRN), the debt settlement arrangement (DSA) and the PIA. The Insolvency Service of Ireland (ISI) was also established under the 2012 Act, and opened for business on 9 September 2013.

RECENT STATISTICS

In its ISI Statistics Quarter 1 2015, published just before the Government's May 2015 announcement, the ISI confirmed the following for the period from the start of Q4 2013 to the end of Q1 2015:

The above statistics indicated that, by the end of March 2015, approximately 27% of PIA applications had resulted in a PIA being approved, with the figure increasing to approximately 36% for DSAs and to approximately 84% for DRNs.

In its ISI Statistics Quarter 2 2015, published after the Government's May 2015 announcement, the ISI confirmed the following statistics for the period from the start of Q4 2013 to the end of Q2 2015:

These statistics indicated a slight increase in approval rates, with just under 30.8% of PIA applications received since the ISI opened for business resulting in a PIA being approved. The approval rate also increased to just under 46.9% for DSAs and just over 92% for DRNs.

BACKGROUND TO THE NEW ACT

In light of the continuing high levels of mortgage arrears and concerns that the 2012 Act gave secured creditors an effective veto over a PIA proposal, the Government announced on 13 May 2015 that, among other initiatives, it intended to amend the 2012 Act to provide for an independent review by the Courts of a secured creditor's decision to reject a PIA.

KEY PROVISIONS OF THE NEW ACT

Court Review

Under the new Act, if a PIA is not approved the personal insolvency practitioner (PIP) may, where so instructed by the debtor and where the PIP considers that there are reasonable grounds to do so, apply to the appropriate Court for an order confirming the coming into effect of the PIA. The relevant creditor(s) must be notified and may lodge a notice of objection with the Court. The Court must hold a hearing "with all due expedition" and may confirm the PIA where it is satisfied as to various matters. The Court will be entitled to take into consideration:

• the conduct of the debtor and creditor(s) within the 2 years preceding the issuing of the relevant protective certificate;
• submissions by the creditor(s); and
• any alternative option available to the creditor(s) for recovery of the debt.

The Court may also make such orders as to the costs of the application "as it deems appropriate".

It is expected that most Court reviews will take place in the Circuit Court. Only cases where the debts exceed €2.5 million will be heard in the High Court.

Important Caveats

Certain conditions must be met for the Court review process to be available:

• 1 January 2015: The Court review procedure only applies where the debt is secured on the debtor's principal private residence and the debtor either:
  • was in arrears on 1 January 2015; or
  • having been in arrears before 1 January 2015, had entered into an alternative repayment arrangement with the secured creditor.

• Creditor Support: For a PIP and debtor to be allowed to apply to Court, they must be able to demonstrate that the majority of at least one class of creditors voted in favour of the PIA at the creditors' meeting. As regards this requirement for creditor support, the following should be noted:
  • that class of creditor need not be a secured creditor;
  • the class of creditor can consist of one creditor, or more than one creditor with similar interests; and
  • where the borrower only has one creditor (it is often the case that a debtor has consolidated its debts with one financial institution) and that sole creditor rejected the PIA proposal, the debtor does not have to demonstrate creditor support when applying for the Court review.

Creditor Voting

• Amending potentially ambiguous wording: The new Act also clarifies the rules in relation to creditor voting for PIAs and DSAs. Concerns had been raised that the wording of the 2012 Act was ambiguous. The Government confirmed that the intention behind the 2012 Act, and the interpretation applied in practice, was that a PIA or DSA proposal could be approved by creditors holding a specified majority of the overall debt. The concern was that the 2012 Act, as worded, could be interpreted as requiring the PIA or DSA proposal to be approved by a majority in number of all creditors. That was not the intention and the wording of the 2012 Act has now been amended to make that clear.
• Further detail on alternative scenarios for meetings: The 2012 Act set out detailed procedural provisions in relation to creditors' meetings. However, while the following two alternative scenarios could also occur under (and were contemplated by) the 2012 Act:
  • only one creditor is entitled to vote at the meeting and that creditor is entitled to notify his/her decision without being required to hold a meeting; and
  • a creditors' meeting is held but no creditor votes (leading to the proposal being deemed to have been accepted),

detailed procedural provisions for those scenarios were not contained in the 2012 Act. Detailed procedural provisions for both scenarios are now included in the new Act.

OTHER NOTABLE PROVISIONS OF THE NEW ACT

Supervision

The ISI will be given more proactive supervisory powers in relation to PIPs, and will be able to appoint authorised officers to carry out this function.

DRN Threshold

The amount of debt which can be covered by a DRN has been increased from €20,000 to €35,000.

OTHER PENDING REFORMS

Bankruptcy

The Oireachtas Joint Committee on Justice, Defence and Equality has recently recommended to the Minister for Justice and Equality that the bankruptcy term (already reduced under the 2012 Act from 12 years to 3 years) be further reduced to 1 year. That Committee also recommended that, if the term is reduced to 1 year, the Official Assignee be given the ability to apply to extend that reduced term from 1 year to 3 years where, for instance, there is excessive unsecured debt or the bankrupt has not worked cooperatively with the Official Assignee. It remains to be seen whether this recommendation is agreed by the Government and introduced into law.

Amendments to Court rules

As part of its announcement on 13 May 2015, the Government signalled that to further promote the reform introduced by the Land and Conveyancing Law Reform Act 2013 whereby a repossession case can be adjourned to give the borrower an opportunity to engage with a PIP, Court rules and procedures would be streamlined so as to help borrowers who are unfamiliar with the Court process and provide clarity around the options available to them.

IMPLICATIONS

The new provisions, once commenced, may lead to increased levels of applications for PIAs and reduce the number of PIA proposals voted against by secured creditors if the possibility of a Court review is seen as an incentive to reach agreement. However, it remains to be seen whether the Courts will in fact take a different view to the vetoing secured creditor if asked to reconsider a rejected PIA and how the Courts will approach what is in effect a commercial rather than a legal decision. It may be the case that the new process reveals that the low level of PIA approvals has largely been due to the secured creditors being asked to take a commercially unsustainable level of debt write-down.

The quick resolution of mortgage arrears issues in Ireland is in the interests of both borrowers and banks. It is likely that the prospect of a Court review will facilitate earlier resolution of more mortgages but, in our view, there is still plenty of protection for banks against wholesale write-downs.

Enormous progress has been made (recent Central Bank statistics indicate that 104,693 PDH mortgage accounts had been restructured by the end of Q1 2015). The remaining un-restructured mortgages were always likely to be the most problematic to resolve

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.