New "Tricks of the Trade" in Personal Insolvency explained

Jim Stafford

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We presented a seminar yesterday on recent Developments in Bankruptcy and Personal Insolvency, at which we explained some of the new "Tricks of the Trade" which arise from recent legislative amendments.

Our guest speaker, Bill Holohan, Solicitor, presented a very insightful talk on the treatment of pensions in Personal Insolvency Arrangements, Debt Settlement Arrangements and Bankruptcy. It is clear from Bill's talk that Insolvent Debtors who are approaching retirement and who wish to "protect" their pension funds need to carefully consider their options and "timing". It is also clear that some debtors could "elect" to draw down their 25% lump sum "early" in order to arrive at a "lump sum" settlement with creditors.

The recent legislative developments add another level of complexity to what was already very complex legislation. Such complexity requires skilful navigation to achieve a result.

We talked about the practical implications of the creditors' veto being removed in "no veto type PIAs". A "No veto type PIA" is a PIA where the debtor was in mortgage arrears on the PPR as at 1 January 2015. The new legislation, which allows debtors to utilise Examinership type voting principles in a certain type of PIA, provides a significant new "Trick of the Trade" if used skilfully.

We explained the application of the new "Examinership" type rules to a "no veto type PIAs". A "no veto type PIAs" could have more “classes” of creditors than an Examinership. For example, a PPR lender is a distinct “class” ( due to extensive legislation on family homes). Other classes of creditors could be:

  • Rates (guaranteed payment within 2 years)
  • Income Tax/VAT/RCT/CGT/CAT
  • Judgement Mortgage
  • Hire Purchase
  • Contingent Debt
  • Retention of Title Creditors
  • Unquantified Legal Claim
  • Connected Person (cannot vote in favour)
  • Trade Creditor
  • Secured Loan
  • Landlord
  • Property Management Charges
For "no veto type PIAs", a 51% vote of creditors in just one class of creditors may be sufficient to carry the PIA over the line! In theory, a PPR lender could approve a PIA that just pays minimal dividends to other creditors.

We also talked about the implications of the bankruptcy term being reduced from 3 years to 1 year, and the fact that the Official Assignee must now "deal with" the family home within 3 years. We presented a case study that showed how a couple could go bankrupt whilst retaining ownership of their family home.

We also talked about what we expected the issues for creditors will be given the recent legislative amendments. I set out below some of these expected issues:

  • As the Courts, in "no veto type PIAs", will review creditors’ “engagement” with the PIP and the debtor, creditors should “positively” engage.
  • Creditors should watch out for Section 111A(6): If the creditor is the only creditor and does not say “yes or no” to the proposal, then the proposal is deemed to be passed.
  • The threat of debtors going bankrupt is now more realistic . Accordingly, creditors should consider informal settlement proposals carefully. If the debtor does go bankrupt the creditors may be faced with costly court applications to re-possess houses etc.
  • Engage with PIPs on “veto” type proposals to avoid costly legal fees. (Costs may be awarded against “unreasonable” creditors.)
  • Will debtors start “managing” their “classes of creditors”?
With the reduction in the bankruptcy term from 3 years to 1 year, it is now almost certain that in many cases a 5 year income type PIA/DSA will produce a better outcome for creditors than a bankruptcy. The legislative change may see the end of the 6 year PIA/DSA which are sometimes demanded by creditors. In some cases a "lump sum" PIA/DSA would produce a better outcome for creditors. Given that the creditors' veto has been removed in certain PIAs, such PIAs are now in many cases virtually guaranteed to be successful.

We finished off the talk by setting out our predictions and identifying issues for the personal insolvency market for 2016 as follows:

  • Possible ISI debtor support package to pay PIP fees to be shortly announced. Such a package would be of great assistance to those debtors who do not have sufficient resources to pay professional fees.
  • ISI fees for the administration of bankruptcies to be increased. The ISI will not continue to act as an “unpaid receiver” for creditors. Accordingly, PIAs/DSAs will be even more attractive to creditors
  • PIA/DSA Protocols will continue to be reviewed
  • “Process efficiencies” to be implemented by ISI (as PIPs’ financial model is “fragile”)
  • Judicial precedents will provide guidance
  • Central Bank to tighten regulatory grip on “Debt Management Firms”. There are still too many firms providing poor quality advice to vulnerable people without any regulation.
  • More informal deals will be achieved
  • More PIAs/DSAs/Bankruptcies
  • The funds who purchased debt will become more aggressive
  • Some debtors may "re-negotiate" old settlements with the banks on the basis that the new legislative amendments provide more options.
  • It will continue to be difficult to raise Mezzanine finance, particularly for deals less than €1 million.
  • Unsecured creditors may receive less dividends in certain future PIAs, as the focus will be to "satisfy" the PPR lender.
  • The €3 million cap on secured debt for entering a PIA will continue to be a major obstacle for many debtors. There is no sign of the €3 million cap being lifted, as nobody appears to be actively lobbying for it to be lifted. There is a perception that the €3 million cap only affects the "big developers". However, the cap also affects thousands of SME business people around the country who invested in property to generate employment.
Anyone who wishes to receive a copy of the presentations may download them from http://www.slideshare.net/frielstafford/developments-in-personal-insolvency-bankruptcy


Jim Stafford
 
Hi Jim,

Fantastic summary of your seminar. I look forward to reading the full presentation..

Am engaging a PIP in the midlands currently ... will forward him your insight on the impact of the new legislation.

BreakOnThru123
(Formally just 'BreakOnThru' but lost access to password AND email account!)
 
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