Joint and Several Debt Partners and PIA's

Dear all

In a PIA, where the debtor ownes property and owns a share of property with other investors, the secrued debt is joint and several.

How will the secured lenders react to proposals from PIP regarding one of the partners, when the secured lender maybe aware of the other partners (on the loan) who have a higher net worth, and maybe a mark for any shortfall?

Section 17 of the Civil Liability Act 1961 provides,

“17. Release of, or accord with, one wrongdoer
(1) The release of, or accord with, one concurrent wrongdoer shall discharge the others if such release or accord indicates an intention that the others are to be discharged.
(2) If no such intention is indicated by such release or accord, the other wrongdoers shall not be discharged but the injured person shall be identified with the person with whom the release or accord is made in any action against the other wrongdoers in accordance with paragraph (h) of subsection (1) of section 35; and in any such action the claim against the other wrongdoers shall be reduced in the amount of the consideration paid for the release or accord, or in any amount by which the release or accord provides that the total claim shall be reduced, or to the extent that the wrongdoer with whom the release or accord was made would have been liable to contribute if the plaintiff's total claim had been paid by the other wrongdoers, whichever of those three amounts is the greatest.”

Accordingly, in the ordinary course, compromising a claim against one party can significantly affect the ability of a creditor to effect recovery against another party who is jointly liable.

There is UK case law (around Individual Voluntary Arrangements) that suggests a creditor’s position may be more robust if it refrains from voting and allows the arrangement to be carried by default rather than voting in favour of the arrangement and Irish creditors may be advised in this regard or take such a position out of caution. Accordingly, there is some risk that creditors who will also have claims against co-obligors may be advised not to vote on schemes.

As matters stand, Section 17 of the Civil Liability Act 1961 can be a major obstacle to negotiating debt foregiveness deals where the parties are jointly and severally liable.

Jim Stafford

Jim,
Will the creditor vote or not? If the creditor does not vote, then under S108 (8) of the PI Act "there no creditor votes then the proposed PIA shall be deemed to be approved..."
However, I assume then the creditor will appeal the PIA under S120 (E) that the "PIA unfairly prejudices the interests of the creditor" which is a mute veto.

The only recourse for the PIP then is to either engage with other 'joint and several borrowers' or demonstrate a remedy under S120?

What some of the Irish banks are doing on UK IVA's is not voting on the proposal, i.e. they abstain. In some cases, because they have abstained, the proposal is voted in by other creditors, and the Irish banks are then bound by the proposal. By abstaining, they do not prejudice their calims against joint borrowers. In practice, the Irish banks will only abstain if they "like" the proposal.

I suspect that the Irish banks will be advised not to vote in favour of a PIA if there are "Joint & Several" issues involved. One way to overcome this hurdle would be for all Joint & Several borrowers to do PIA's at the same time.

Jim Stafford

Jim

Where can I find the UK caselaw you referred to on this please?

So far I have only found a note on Johnson v Davies and the relevance of the intention. It would suggest that what is important is the intention of the arrangement itself.

Thanks

The Johnson v Davies case appears to be the main authority. If you read the case you will note that it refers to another cases, RA Securities v Mercantile Credit.

The best way to deal with Joint & Several debt is to have a well crafted PIA/DSA put in place which makes it clear that the creditors are not compromising their claims against the other parties if they vote in favour of it.

It will take a High Court case to firmly establish the interpretation of the legislation.

Jim Stafford

Section 116(6) of the Personal Insolvency Act 2012 appears to make it clear that a creditor is not prevented from taking legal proceedings or enforcing a judgment against the other parties to a 'joint and several' loan:

(6) Nothing in subsections (3) and (4) shall operate to prevent a
creditor taking the actions referred to in that subsection as respects
a person who has jointly contracted with the debtor or is jointly liable
with the debtor to the creditor and that other person may sue or be
sued in respect of the contract without joining the debtor.

Whilst there is no prohibition on creditors taking actions against other parties, the concern is whether the creditor can sue the other parties for the full amount of the loan/guarantee, or whether the creditor is restricted to sue for the % that it is expected to receive from the initial debtor.

The issue is best illustrated by an example. If two people, A & B, are jointly and severally liable to a bank for a loan of €100,000, and if A enters into a PIA which pays the bank €10,000 (i.e. 10%), is the bank restricted to recovering just €10,000 from B? Or could the bank sue B for the remaining €90,000? B could argue that he entered into a Joint & Several arrangement, and that as A is now only paying €10,000, he should only pay €10,000. Alternatively he could argue that he understood that his liability should be restricted to just 50% of the loan etc. B could argue that his constitutional property rights have been affected by the PIA.

It will take a High Court case to firmly establish the interpretation of the legislation.

Jim Stafford

Hi Jim,

Have a question on this if you can help. If there are 10 partners as creditors to a lender. If 6 or 7 have agreed to settle the PG debt for say €25,000, are the remaining partners entitled to settled on the same amount?

Thanks