Judge makes ruling on personal insolvency case that will have consequences for around 100 more

Courts cannot approve what are known as 'debt for equity swaps' in personal insolvency arrangements unless there is consent from the relevant secured creditor, a High Court judge has found.

In a test case, Mr Justice Denis McDonald held there are no provisions in the 2012 to 2015 Personal Insolvency Act that would allow the court approve a Personal Insolvency Arrangement that proposes debt for equity swaps without the consent of the creditor.

The judge's findings were contained in a ruling where he dismissed an appeal brought on behalf of Ms Denise Lowe against the Circuit Court's refusal to approve her Personal Insolvency Agreement (PIA).

As part of her proposed PIA, Bank of Ireland (BOI) was offered just over 43% equity in her family home, which is valued at €300,000.

BOI had rejected the proposal on grounds including that the proposal was unworkable, unsustainable, inherently unfair to it and that it did not satisfy certain requirements of the Insolvency Acts.

The case is regarded as a test case as there are approximately 100 other similar proceedings pending before the courts.

It is also understood that many more debtors, who had been considering offering debt for equity swaps as part of their proposed PIAs, had been awaiting the outcome of the action before formally entering the personal insolvency process.

Ms Lowe, with an address at Ballinfull, Co. Sligo, had sought approval of a PIA that would have allowed her to write off a significant amount of her total indebtedness of €560,000.

The court heard that her biggest debtor is Bank of Ireland (BOI) which she owes €358,000 on foot of a mortgage obtained in respect of her home.

Under her proposed PIA, she would have continued to make regular payments over the next 22 years on €170,000 of that mortgage.

Her PIA also proposed a 'debt for equity swap', where the bank would get 43.3% equity, worth €130,000, in her home. The remaining €58,000 owed to BOI would be written off.

Seeking to overturn the Circuit Court's refusal to approve Ms Lowe's PIA, her PIP's counsel Keith Farry Bl argued before the High Court that the 'debt for equity' solution provides significant benefits in cases where debtors lack the means to service repayments of their mortgage debts.

Counsel said the proposal allows creditors like banks to get an interest in a property which is likely to increase in value over time.

BOI opposed the application on grounds that in the 2012 to 2015 Acts 'debt for equity swaps' can only take place with the secured creditor's consent, which in Ms Lowe's case was not forthcoming.

The bank also argued that such swaps can only take place where the debtor has some positive equity in the secured property. Ms Lowe, BOI said, has no such equity.

BOI said the acts don't allow arrangements where there is a reduction of the principle sum due on the mortgage to be less than the value of the family home over which the bank holds security.

BOI further argued that under the proposed PIA it would get no more than "hope value" of the property based on the hope that the value of the property will increase in the future.

Dismissing the appeal Mr Justice McDonald said, in circumstances where the principal sum has been reduced below the market value of the family home, the proposed PIA could not be confirmed in the absence of consent from the bank.

There was, he held, an absence of any provision in the 2012-15 Acts that permits a 'debt for equity swap' arrangement.

Mr Justice McDonald added that significant amendments to the Insolvency laws are required if arrangements such as 'debt for equity swaps', where consent is not given, can be approved by the courts.

"It is not for the court to suggest what form any such amendments should or might take," the judge said, as that was a matter "entirely for the Oireachtas."

"If any such amendments are to be made I would strongly urge that such statutory provisions introducing new debt resolution solutions should be set out in sufficient detail to enable practitioners, debtors and creditors to identify and fully understand the precise scope and boundaries of any such solutions," he added.