Insolvency legislation useless without creditors’ goodwill

THE new personal insolvency legislation is now in place and applications are being made to the Insolvency Service of Ireland in relation to debt relief notices, debt settlement arrangements, and personal insolvency arrangements.

The legislation represents a very significant reform and modernisation of Irish personal insolvency law by putting in place a significant legal framework to deal with over-indebtedness. It was designed primarily to alleviate the enormous financial burden affecting large numbers of Irish people who became significantly over-indebted in the boom years. The legislation aims at providing a rebalancing of interest between lenders and borrowers. The Personal Insolvency Act is closely aligned to similar insolvency legislation which has been operating successfully in jurisdictions such as Britain and Canada.

However, in this jurisdiction, the over-indebtedness problem is related almost exclusively to property debt, which is not the case in other jurisdictions. Both personal insolvency arrangements (PIA) and debt settlement arrangements (DSA) offer financially distressed debtors options, other than bankruptcy, to tackle their debt problems while also ensuring that creditors, both secured and unsecured, are closely involved in the process and are achieving a better result than they would get in a bankruptcy scenario.

One of the key features of the legislation in relation to the two-debt settlement arrangements is that creditors retain a considerable level of dominance over the debtor, in that in order for a proposed arrangement to be approved at a creditors’ meeting, it must be approved by a majority representing not less than 65% in value of the total debt due. The creditors (which in most cases will be the bank/mortgage lender) can therefore exercise a veto over the arrangement.

The major issue that needs to be resolved, and which is key to the success or failure of the PIA in particular, is whether banks/mortgage lenders will be prepared to accept a writedown of secured debt.

Some banks are fairly vocal about their reluctance to accept writedowns and we believe that all banks would have a preference for informal arrangements to be carried out with the borrowers without reference to the legislation.

For a PIA/DSA to be successful, the debtor must have something tangible to bring to the table. Without significant assets, the debtor’s only alternative is to make some contribution from their income. However, this is fairly problematic in the current climate, when incomes have substantially dropped from pre-recession times. The only other viable options would be contributions from inheritances or windfalls or support from immediate family or other relations. Banks will have to accept the reality that the only alternative for many debtors is bankruptcy, where there will be no prospect of any return compared to a formal arrangement where there would be some return. If the legislation provided for the Insolvency Service to have the power to force banks/lenders to accept viable proposals from debtors which made commercial sense, the legislation would in our opinion be more robust.

The involvement of the Personal Insolvency Practitioner is also key to the success or failure of the regime. To date, the Insolvency Service of Ireland has authorised a total of 73 individuals to act. The new legislation is detailed and complex and it requires a significant amount of expertise and involvement from the PIPs to deal with the issues and steer the arrangement to a successful conclusion. The PIPs are professionals who require to be paid for their services. However, anecdotal evidence from newly appointed PIPs is that debtors, in the main, do not have sufficient funds to discharge PIP and ISI fees. This is a major problem and potential barrier to the success in particular of the Personal Insolvency arrangements.

IN RELATION to ordinary mortgage-holders in particular who are in negative equity, the reality is that a significant number of people in this category are earning less than the reasonable living expenses as set out in the ISI guidelines and have no surplus disposable income to fund a DSA/PIA.

An application for bankruptcy is also cost-prohibitive and beyond the reach of many debtors. The cost of a bankruptcy petition where a solicitor is involved could be as little as €5,000 to €6,000. As matters stand, bankruptcy will be more attractive to many debtors/borrowers as it brings certainty and finality (exit after three years) in contrast to a potentially punitive regime of five to six years (or longer) under a PIA or DSA.

From our experience to date, we believe that the DSA procedure can be a success particularly for the self-employed and consumer debt market, those whose debt problems are not properly related.

However, in our view, the personal insolvency legislation as it stands may not achieve its objectives of relieving debt for the great majority of distressed borrowers, as they simply do not have the surplus income or assets available to contribute to an arrangement or even to meet the costs of a bankruptcy application. For the legislation to work, there may be a requirement for a state-funded or creditor/bank-funded insolvency service.

* Sean Kelly is a director of the restructuring and insolvency department at RSM Farrell Grant Sparks


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