Guest Post: UCL's Joseph Spooner on the Modernisation of Irish Personal Insolvency Law

30 January 2012

I am grateful to UCL's Joseph Spooner for providing the following summary of the recent modernisation movements in Irish personal insolvency law:

"The Irish Government last week published its long-awaited Draft General Scheme of a Personal Insolvency Bill, thus acting on recommendations of the Law Reform Commission of Ireland (LRC); commitments given by Ireland to the IMF/EU/ECB “Troika”; and the Government’s own promises on entering office in 2011. Drawing extensively from the LRC recommendations, the Department of Justice’s self-styled “radical” plans include amendments to existing bankruptcy law alongside the introduction of three new personal insolvency procedures.

In amending what the LRC called the “outdated and ineffective” Bankruptcy Act 1988, the draft legislation first proposes to reduce the infamously severe 12-year period for which Irish debtors must wait before being discharged from bankruptcy. The proposals plan to reduce this period to 3 years, apparently even in respect of outstanding cases, meaning recent high-profile bankruptcies such as that of Seán Quinn will not endure for as long as had been expected on adjudication. The draft legislation also provides however for the possibility of court-ordered repayments from the debtor’s income after discharge, for a period of up to five years. The Government did not adopt all of the LRC’s proposed reforms, and the draft legislation notably contains no plans to remove the economic and civic restrictions and disqualifications that currently apply automatically to all debtors entering bankruptcy, irrespective of their culpability. Similarly, the proposals have ignored the LRC’s recommendation to support unsecured creditors and to align Ireland with its peers in the common law world and elsewhere by removing the preferential creditor status of the State tax authorities.

The Bankruptcy Act’s failings mean that at present Ireland effectively lacks a consumer insolvency procedure (there were only 29 bankruptcies in 2010). The Government’s proposals aim to address this problem by introducing three new mechanisms. The first, designed for “No Income, No Assets” cases, is entitled the “Debt Relief Certificates” procedure and is based closely on the LRC’s recommendations. This non-judicial procedure is to be administered by a proposed new State agency (familiarly entitled the “Insolvency Service”). Insolvent debtors owing less than €20,000, whose monthly net disposable income falls below €60, and who hold assets worth €400 or less, will be permitted to apply for this procedure through an approved intermediary, on payment of a fee of €90. If the Insolvency Service finds that the access conditions are established, it will issue a debt relief certificate that has the effect of staying all legal proceedings against the debtor, before discharging the debtor’s obligations after a period of one year (with certain debts such as family law obligations exempt from the discharge).

The final new mechanism recommended by the LRC was a Debt Settlement Arrangement procedure, which would allow a debtor  to come to a non-judicial arrangement with his/her creditors involving part repayment over a number of years, in exchange for the discharge of the debtor’s remaining obligations. In a partial departure from the LRC recommendations, the Government proposes two such non-judicial arrangement procedures, with one limited to unsecured debts and the other including secured debts. First, the Debt Settlement Arrangement (DSA) procedure provides that an insolvent debtor owing more than €20,000 may apply to the Insolvency Service for a Protective Certificate to obtain a stay of creditor enforcement efforts pending the negotiation of an arrangement. The debtor will then propose an arrangement to his/her creditors through a personal insolvency trustee, who must inspect the debtor’s satisfaction of the application conditions, prepare a viable and fair proposal, and summon a creditor’s meeting. The proposal will become a DSA if agreed by a majority of 65% in value of creditors voting at the meeting, and if confirmed by a local court. The arrangement, which must leave the debtor with assets and income necessary to maintain the debtor’s employment and reasonable standard of living, can last up to a period of six years, after which the debtor’s obligations are discharged (with certain debts such as family law obligations excepted). These provisions are more conservative than those proposed by the LRC, which had recommended a maximum duration of five years. In addition, the LRC had proposed a reduced power of obstruction for creditors, recommending that a majority of only 60% of voting creditors would be required to approve an arrangement, and that regulatory rules should prevent creditors from demanding that the debtor’s offer meet “hurdle” or “threshold” rates of minimum repayment.

The LRC had proposed the inclusion of secured debts in its single arrangement procedure, with a secured creditor to be given the option to enforce, surrender, or retain its security, while claiming as an unsecured creditor for any remaining balance owed. The Government’s proposals however exclude secured creditors from the DSA procedure, and instead provide for a discrete Personal Insolvency Arrangement (PIA) mechanism. This procedure is designed to allow debtors with mortgage debt difficulties to reach solutions permitting them to continue to live in their homes, thus dealing with issues of social and economic policy which the LRC acknowledged as being more appropriately addressed by political authorities. Insolvent debtors owing more than €20,000 but less than €3 million are eligible to apply (via a personal insolvency trustee) to the Insolvency Service to avail of the mechanism. The procedural conditions largely follow those of the DSA as described above, albeit with some variation such as additional “verification checks” of the debtor’s eligibility to enter the PIA procedure (which may involve the sharing of data across Government departments). A wide range of potential repayment options in respect of secured debt is specified under the PIA provisions (including repayment term extension, interest rate variation and principal reduction), with many of these alternatives drawn from a Government Working Group report on Mortgage Arrears published last year. The level of creditor agreement required to approve a PIA is also different to that under a DSA, with 75% of secured creditors and 55% of unsecured creditors required to accept the debtor’s proposal.  In addition, under the PIA repayments can last for a longer period of up to seven years. At the end of this period the remainder of the debtor’s unsecured debts are to be discharged (subject to exempted obligations); but his/her secured debts are to be discharged only to the extent to which the arrangement provides, and every secured creditor is to be entitled to retain a debt of at least equal value to that of its security.

Under all three non-judicial mechanisms, creditors will be given the opportunity to object both before the Insolvency Service and the court throughout the process, and a range of offences will be created to deter debtor misconduct. In addition, a Personal Insolvency Register is to be established in which details of all cases under these procedures are to be registered.

One notable omission in the Government’s proposals is their lack of detail concerning plans for regulating the envisaged position of “personal insolvency trustee”. In Ireland, there is no legally recognised office of “Insolvency Practitioner” of the kind regulated in the UK, and the LRC had made detailed recommendations for the establishment of a new regulatory regime for all personal insolvency trustees. In contrast, the Government’s proposals merely provide that the specifications of this position are to be supplied subsequently in secondary legislation. The LRC’s final Report also made extensive recommendations for the establishment of a new system for the enforcement of judgment debts and the introduction of a regulatory regime for the extra-judicial debt collection industry, but the Government’s proposals do not refer to these subjects.

This draft legislation is subject to change, as in accordance with an unusual procedure it is due for pre-legislative scrutiny in a Parliamentary committee in March, before a final Bill is to be published by the end of April. The coming months should thus provide interesting times for insolvency law stakeholders and observers, as well as an anxious wait for the thousands of Irish people currently struggling with debt difficulties."

Joseph Spooner, BCL (NUI), BCL (Oxon.), PhD Candidate, UCL. Joseph worked as Principal Legal Researcher on the Law Reform Commission of Ireland’s Consultation Paper, Interim Report and final Report on Personal Debt Management and Debt Enforcement. Any views expressed remain the contributor’s own unless otherwise stated however.