Jim Stafford
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The Government felt that some creditors were voting against (“PIAs”) and that such voting was jeopardising debtors’ abilities to retain their family home. Accordingly, they sought a way to restrain the creditors’ veto in respect of PIAs.
The Government announced on 13 May that the Personal Insolvency Act 2012 would be amended to provide for a court review which would follow an 'examinership' approach adopted in corporate insolvencies. Under corporate examinership, if one “class” of affected creditors votes in favour of a Scheme of Arrangement, then the Scheme can be held to be binding on all creditors.
In drafting the new amendments, the Government had to be very mindful of constitutional property rights. Given the proven success of corporate examinerships, it is felt that adopting the examinership model to personal insolvency will work.
The amending Bill passed all stages in the Oireachtas, and was signed into law by the President on 28th July. However, the legislation could not become effective until the Rules Committee of the Superior Courts amended the relevant court rules, and this has now taken place. The new legislation is effective from 20th November.
To say that the amendments are complex is an understatement! The amendments to the Act will only apply to debtors who have a debt which is secured over their family home and in respect of which the debtors, on 1 January 2015, were in arrears with their payments, or the debtors, having been, before 1 January 2015, in arrears with their payments, had entered into an alternative repayment arrangement with the secured creditor concerned. As such, possible removal of the creditors’ veto only applies to a Personal Insolvency Arrangement (“PIA”) and does not apply to Debt Settlement Arrangements.
If a PIA is voted against at the creditors meeting, then the debtor has the right to appeal to the courts to review the creditors’ votes.
Position where the debtor has only one creditor
Where the debtor has only one creditor, which, by definition, would have to be a creditor secured on the family home, it is possible to appeal a no vote to the courts.
In reality, where a debtor has already entered into an alternative repayment arrangement with his lender, it will be very difficult for a Personal Insolvency Practitioner (“PIP”) to even commence the process of a PIA, as the lender will have probably ensured that the debtor is already solvent within the meaning of the legislation. The definition of solvency is being able to pay debts as they fall due. For example, you might have a debtor whose family home is valued at €200,000 but has a mortgage of €350,000. If the lender is prepared to give a “split” mortgage, and asks the debtor to pay €1,200 a month on €200,000, and “parks” the remaining €150,000, then the debtor might be cash flow solvent, and therefore not eligible for a PIA.
It is possible that the courts might take the view that debtors should be allowed to stay in their family home if they can demonstrate that they are able to at least pay “normal” loan instalments on the market value of their family home, as opposed to the value of the loan itself. If the courts take such a view, it will be interesting to see what the court’s interpretation of “normal” instalments will be, given that there will be arguments over interest rates, market value of the property and length of mortgage etc.
Position where the debtor has more than one creditor
Where the debtor has more than one creditor, and his PIA is voted down, but some creditors have voted in favour of the PIA, it will be possible to appeal to the courts.
In order for such an appeal to be successful, it must be shown that at least one class of creditors has accepted the PIA proposal, by a majority of over 50% of the value of the debts owed to that class. However, the definition of class for this purpose is not limited to the classes applicable under the legislation (i.e. the existing classes of overall creditors, secured creditors and unsecured creditors) but uses a more flexible “examinership” test. A class may be comprised of any creditors having interests or claims of a similar nature, and a single creditor may be sufficient to constitute a class, though the Court will have regard to the overall number and composition of the creditors and to the proportion of debts due to the class supporting the proposal.
Other areas that need reform
It is disappointing that the Government is adopting a "sticky plaster" approach to legislation that is fundamentally not working. The new amendment on the veto will not be of any further assistance to any of the following categories of people:
1) People who have secured debt of more than €3 million (as creditors have to give written consent to debtors to enter a PIA.)
2) People who have fallen into mortgage arrears since 1 January 2015.
3) People who have no debt on their family homes, but who face the risk of losing their family homes as a result of giving personal guarantees on behalf of children, personal guarantees to creditors on business lending etc.
4) People who are current with their home mortgage, but who have unsecured debt elsewhere.
The Government's "sticky plaster" approach to legislative reform is making it very difficult for professional advisors to advise clients, as advisors do not know what the legislation will be in, say, 6 months’ time.
Conclusion
The amendments to the legislation restraining the creditors’ veto will certainly help some people, particularly those people who have mortgages with providers who have thus far refused to engage in the PIA process. However, I believe that in many cases it will be difficult to get loans actually written off on family homes, as I anticipate that many lenders will just simply agree “split” mortgages with debtors and “park” residual debt. Such “split” mortgages do technically restore people to solvency within the meaning of the legislation, even though the debtor may still be ”balance sheet” insolvent. Such people may face a life time of living on Reasonable Living Expenses, with yearly reviews. It remains to be seen if the courts will restrict the amount of debt that may be “parked” on a family home.
As with any new legislation, it will be necessary to see how the courts interpret it to determine if it is workable or not.
Jim Stafford
The Government announced on 13 May that the Personal Insolvency Act 2012 would be amended to provide for a court review which would follow an 'examinership' approach adopted in corporate insolvencies. Under corporate examinership, if one “class” of affected creditors votes in favour of a Scheme of Arrangement, then the Scheme can be held to be binding on all creditors.
In drafting the new amendments, the Government had to be very mindful of constitutional property rights. Given the proven success of corporate examinerships, it is felt that adopting the examinership model to personal insolvency will work.
The amending Bill passed all stages in the Oireachtas, and was signed into law by the President on 28th July. However, the legislation could not become effective until the Rules Committee of the Superior Courts amended the relevant court rules, and this has now taken place. The new legislation is effective from 20th November.
To say that the amendments are complex is an understatement! The amendments to the Act will only apply to debtors who have a debt which is secured over their family home and in respect of which the debtors, on 1 January 2015, were in arrears with their payments, or the debtors, having been, before 1 January 2015, in arrears with their payments, had entered into an alternative repayment arrangement with the secured creditor concerned. As such, possible removal of the creditors’ veto only applies to a Personal Insolvency Arrangement (“PIA”) and does not apply to Debt Settlement Arrangements.
If a PIA is voted against at the creditors meeting, then the debtor has the right to appeal to the courts to review the creditors’ votes.
Position where the debtor has only one creditor
Where the debtor has only one creditor, which, by definition, would have to be a creditor secured on the family home, it is possible to appeal a no vote to the courts.
In reality, where a debtor has already entered into an alternative repayment arrangement with his lender, it will be very difficult for a Personal Insolvency Practitioner (“PIP”) to even commence the process of a PIA, as the lender will have probably ensured that the debtor is already solvent within the meaning of the legislation. The definition of solvency is being able to pay debts as they fall due. For example, you might have a debtor whose family home is valued at €200,000 but has a mortgage of €350,000. If the lender is prepared to give a “split” mortgage, and asks the debtor to pay €1,200 a month on €200,000, and “parks” the remaining €150,000, then the debtor might be cash flow solvent, and therefore not eligible for a PIA.
It is possible that the courts might take the view that debtors should be allowed to stay in their family home if they can demonstrate that they are able to at least pay “normal” loan instalments on the market value of their family home, as opposed to the value of the loan itself. If the courts take such a view, it will be interesting to see what the court’s interpretation of “normal” instalments will be, given that there will be arguments over interest rates, market value of the property and length of mortgage etc.
Position where the debtor has more than one creditor
Where the debtor has more than one creditor, and his PIA is voted down, but some creditors have voted in favour of the PIA, it will be possible to appeal to the courts.
In order for such an appeal to be successful, it must be shown that at least one class of creditors has accepted the PIA proposal, by a majority of over 50% of the value of the debts owed to that class. However, the definition of class for this purpose is not limited to the classes applicable under the legislation (i.e. the existing classes of overall creditors, secured creditors and unsecured creditors) but uses a more flexible “examinership” test. A class may be comprised of any creditors having interests or claims of a similar nature, and a single creditor may be sufficient to constitute a class, though the Court will have regard to the overall number and composition of the creditors and to the proportion of debts due to the class supporting the proposal.
Other areas that need reform
It is disappointing that the Government is adopting a "sticky plaster" approach to legislation that is fundamentally not working. The new amendment on the veto will not be of any further assistance to any of the following categories of people:
1) People who have secured debt of more than €3 million (as creditors have to give written consent to debtors to enter a PIA.)
2) People who have fallen into mortgage arrears since 1 January 2015.
3) People who have no debt on their family homes, but who face the risk of losing their family homes as a result of giving personal guarantees on behalf of children, personal guarantees to creditors on business lending etc.
4) People who are current with their home mortgage, but who have unsecured debt elsewhere.
The Government's "sticky plaster" approach to legislative reform is making it very difficult for professional advisors to advise clients, as advisors do not know what the legislation will be in, say, 6 months’ time.
Conclusion
The amendments to the legislation restraining the creditors’ veto will certainly help some people, particularly those people who have mortgages with providers who have thus far refused to engage in the PIA process. However, I believe that in many cases it will be difficult to get loans actually written off on family homes, as I anticipate that many lenders will just simply agree “split” mortgages with debtors and “park” residual debt. Such “split” mortgages do technically restore people to solvency within the meaning of the legislation, even though the debtor may still be ”balance sheet” insolvent. Such people may face a life time of living on Reasonable Living Expenses, with yearly reviews. It remains to be seen if the courts will restrict the amount of debt that may be “parked” on a family home.
As with any new legislation, it will be necessary to see how the courts interpret it to determine if it is workable or not.
Jim Stafford