A. Overview

Heads of the Personal Insolvency Bill were published on 25 January 2012 providing for amendments to the Bankruptcy Act and for the introduction of new non-judicial debt settlement procedures.  The proposals will introduce a modernised personal insolvency regime designed to distinguish between persons who are unable to repay debts and those who are unwilling to repay debts.  The proposals also attempt to create an appropriate balance between the rights of debtors and creditors where a personal insolvency occurs.

B. Summary of the Scheme of the Personal Insolvency Bill

The Scheme of the Bill provides for the following:

1.  Insolvency Service
The Bill provides for the establishment of an Insolvency Service which will oversee the proposed non-judicial personal debt settlement system.  The Insolvency Service will be a body corporate and the staff will be civil servants.

2.  Debt Relief Certificates
The Bill provides for a Debt Relief Certificate (“DRC”) to be issued by the Insolvency Service which will write off unsecured qualifying debt.  With the assistance of an approved intermediary, the debtor may apply to the Insolvency Service for a certificate that the qualifying debts be subject to a one year moratorium period following which if the debtor still cannot pay, the Insolvency Service can certify that the debt is written off.  Qualifying debts include credit card debt, overdrafts, unsecured loans, rent, utilities, telephone bills and guarantees.  Excluded debts include court fines, child support and spousal maintenance payments.

Requirements for a DRC:

• The debtor has qualifying unsecured debts of €20,000 or less
• The debtor has a net monthly disposable income of €60 or less after provision for normal household expenses and assets and savings worth €400 or less

The effect of a DRC:

• A moratorium period of one year commences during which creditors of qualifying debt may not commence a creditor’s petition or other legal proceeding in respect of the debt except with the Court’s permission and a stay is put on existing proceedings which relate to qualifying debt
• Following a moratorium period of one year, if the debtor is unable to repay the qualifying debts, they will be deemed to be discharged
• The DRC will be registered and is binding on qualifying debt
• A further DRC cannot be applied for within 6 years
• A DRC may not be availed of more than twice
• A DRC has no effect on secured debt

3.  Debt Settlement Arrangements
The Bill proposes a system of Debt Settlement Arrangements (DSA) between a debtor and two or more creditors to repay an amount of unsecured debt over a defined period of up to 5 years. The debtor may apply to the Insolvency Service for a Protective Certificate in respect of the preparation of a DSA. A Protective Certificate, if granted, will provide a standstill period of 30-40 working days to allow for a creditors meeting to consider the DSA. The personal insolvency trustee proposes the DSA to the creditors and if approved by creditors representing 65% in value of qualifying creditors, all debts covered by the DSA would be compromised.

Requirements for a DSA:

• The debtor has unsecured qualifying debts in excess of €20,000
• The DSA requires the approval of 65% in value of qualifying creditors
• Only one application for a DSA is permitted in a ten-year period

The effect of a DSA:

• A DSA if approved, is binding on all qualifying creditors
• The DSA will come into effect on registration by the Insolvency Service
• At the end of the DSA the creditor is deemed to be repaid in full and the debtor is discharged from the remainder of his/her debts covered by the arrangement
• In certain circumstances, with creditor approval, the DSA may be varied or terminated
• Creditors may challenge a DSA in the Circuit Court on specified grounds including where the DSA unfairly prejudices the interests of a creditor or where there is a material inaccuracy in the debtor’s Statement of Affairs which causes a material detriment to the creditor
• A DSA does not affect the rights of secured creditors

4.  Personal Insolvency Arrangements
The Bill proposes a system of Personal Insolvency Arrangements (PIA’s) between a debtor and one or more creditors to repay an amount of both secured and unsecured debt over a set period.  A personal insolvency trustee, operating in a manner that is fair to all parties and having considered the full financial circumstances of the debtor, will make the PIA proposal to creditors. If it is accepted by creditors (see below), it will be binding and will be administered by the personal insolvency trustee.

Requirements for a PIA:

• The debtor has debts between €20,001 and up to a maximum of €3m
• The debtor is cash flow insolvent (i.e. unable to pay their debts in full as they fall due) and it is unforeseeable that over a 5 year period the debtor will become solvent
• A DSA would not be a viable alternative to restore the debtor to solvency over a five year period
• The PIA must be approved by at least 65% of creditors in value and at least 75% of secured creditors and 55% of unsecured creditors
• A debtor will only be able enter into a PIA once in his lifetime

The effect of a PIA:

• An approved PIA will be binding on all relevant creditors and will provide for payment of debt over a 6 year period
• To the extent that they are not provided for in the PIA, all other debt obligations will remain
• A PIA may be varied or terminated in certain circumstances
• Creditor objections to a PIA may be taken to the Circuit Court on specified grounds including where the PIA unfairly prejudices the interests of a creditor and where there is a material inaccuracy in the debtor’s Statement of Affairs which causes a material detriment to the creditor

The effect of a PIA on secured creditors:

• The requirement that 75% of secured creditors vote in favour of a PIA means that without the support of 75% of secured creditors a PIA cannot become binding on a secured creditor
• There are detailed provisions which provide for how security can be treated in a PIA.  This can include sale, surrender and retention of the secured property. Where the PIA provides for the sale of a secured property and the value realised from the sale is less than the secured debt, the balance due to the secured creditor will (unless the PIA provides otherwise) rank equally with unsecured debts in the PIA and the debtor shall be discharged from the balance due on completion of the PIA
• A “clawback” is permitted in certain circumstances where a sale of a secured asset is achieved at a value greater than that attributed to the secured creditor in the PIA. Any uplift is to be paid to the secured creditor
• There are other provisions that allow a PIA to provide for changes in the payment terms of a loan to include deferral of payment and changes to payments of capital and interest.  The proposed legislation does not elaborate on the grounds for alterations to the payment terms

The Principal Private Residence in a PIA

A PIA may not include terms that would require a debtor to cease to occupy his or her principal private residence unless (a) the debtor confirms in writing to the personal insolvency trustee that the debtor does not wish to remain in occupation for the duration of the PIA; or (b) the costs to the debtor of remaining in occupation of his principal private residence are in the opinion of the personal insolvency trustee disproportionately large relative to the debtors income and other financial circumstances and the reasonable accommodation needs of the debtor and his dependents.  A PIA cannot contain terms providing for a disposal of the debtor’s interest in the principal private residence unless the debtor has obtained independent legal advice or has been advised to obtain such advice and the requirements of the Family Home Protection Act 1976 are satisfied to the extent possible.

5.  Bankruptcy
The Bill provides for a number of important amendments to the Bankruptcy Act 1988.  The bankruptcy reforms include the following:

• The automatic discharge period from bankruptcy is reduced from 12 years to 3 years
• The discharge from bankruptcy can be delayed by the court for up to a maximum of 8 years, for non-co-operation with the Official Assignee, or for fraudulent or dishonest behaviour by the bankrupt during the process
• Provision for a court to make a payment order requiring the discharged bankrupt to make certain payments in favour of creditors, for a period of up to 5 years after discharge
• Extended timeframes of up to 3 years  for review of pre-bankruptcy transfers or settlement of assets by the bankrupt
• The introduction of a minimum debt amount of €20,001 in respect of a creditor petition for bankruptcy

It is anticipated that a full Bill will be published by the end of April 2012.  If you have any questions on the content of this summary, please contact Fergus Doorly, Michael Quinn or Barry Cahir.