Responsiveness

Performance

FEBRUARY 2012

Financial Regulatory Group Briefing

Proposed Personal Insolvency Bill

On 25 January 2012 the Government approved and published the heads
of the proposed Personal Insolvency Bill (the Draft Bill). The Draft
Bill proposes the introduction of three non-judicial debt settlement
arrangements and a reform of the existing bankruptcy regime. The new
arrangements will allow for the write down or restructuring of both
secured and unsecured debt owed by certain eligible individuals. This
briefing introduces the arrangements, with a focus on the proposals
relating to secured debt.
There has been general agreement that change to the existing regimes for the resolution of
personal insolvency has been necessary for some time and various public groups have reported
on the relevant issues.1 The Draft Bill represents the Governments proposals to implement
reform in this area and is likely to be subject to considerable comment and change during the
legislative process.

The proposals
Insolvency Service and personal insolvency trustees
The Draft Bill proposes the establishment of an independent body to be known as the Insolvency
Service that will oversee the non-judicial personal insolvency system (the Service). The Service
will have a role in the debt settlement process and will maintain a register of the settlement
arrangements. It is also proposed that personal insolvency trustees (Trustees) and approved
intermediaries will be licensed or authorised and will play a key role in advising and formulating
certain of the arrangements.

Settlement arrangements
The Draft Bill provides for three separate non-judicial debt settlement arrangements (the
Arrangements) designed to offer an alternative to bankruptcy. These are:
This document contains
a general summary of
developments and is not
a complete or definitive
statement of the law. Specific
legal advice should be obtained
where appropriate.

Debt Relief Certificates (DRC);

Debt Settlement Agreements (DSA); and
Personal Insolvency Arrangements (PIA).
1

The proposals contained within the Draft Bill build upon those contained in report of the Law Reform Commission on
Personal Debt Management and Debt Enforcement published in 2010. The Draft Bill was also preceded by the
publication of a report by the Mortgage Arrears and Personal Debt Expert Group in 2010 and a report by the
Governments Inter-Departmental Mortgage Arrears Working Group in September 2011.

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PROPOSED PERSONAL INSOLVENCY BILL

FEBRUARY 2012

There are a number of common themes in each of the

Arrangements, such as:

they are available in respect of certain debt incurred by

a natural person (not a corporate) through personal

consumption or in the course of his or her business,
trade or profession;

Debt Relief Certificate

A DRC allows full write-off of qualifying unsecured debt up
to 20,000 following a one-year moratorium.
It has no effect on secured debt.

a DSA and PIA will generally not affect the full

Scope
The DRC procedure is designed to provide debt forgiveness
to those debtors with little or no ability to pay off their
debts. In addition to being insolvent, the specific eligibility
criteria for a DRC include the debtor having a net disposable
income of less than 60 per month after certain expenses
are deducted and assets or savings worth 400 or less. A
DRC can only be made in respect of qualifying unsecured
debt which include debts related to credit cards, overdrafts,
unsecured loans, utilities and guarantees.

in all cases there is a restriction on the number of times

In contrast to DSAs and PIAs, a DRC is proposed by the

debtor to the Service (through an approved intermediary),
rather than to creditors. The Service may then grant or
refuse the application on certain grounds.

a debtor will only be eligible where they are insolvent

(i.e. unable to pay their debts as they fall due) and meet
other eligibility criteria (such as in relation to residency);

the application or proposal is always made through an

approved intermediary or Trustee, who will also offer

advice to the debtor;
repayment of preferential debts, as defined under the
current bankruptcy regime (e.g. rates, income tax,
etc.); and
and frequency of use of the Arrangements and there may
be restrictions on the availability of the Arrangements
where certain other processes (such as bankruptcy) are in
train or have previously been availed of.

Only the PIAs affect secured debt.

Summary
Of particular note in the Draft Bill is the inclusion of PIAs
(see Personal Insolvency Arrangement below). Secured debt
(including residential mortgages and Buy to Let loans) can
be included in these arrangements. Whilst the current
drafting makes it unlikely that mortgage lenders will, in
many circumstances, be compelled to accept a write down
of their debt, the Draft Bill provides a formal process by
which debtors can at least apply for this. The process should
be robust enough to differentiate between the cant pays
and the wont pays, so in our view it is unlikely that there
will be a flood of mortgage write downs. Having said that, in
many cases this will be the only option and in those cases
there are still protections for secured creditors (including a
claw back).
Many parties will be interested in the Draft Bill as it
proceeds through the legislative process. These include:

investors in Irish RMBS and covered bonds who will be

concerned that collateral could be written down;

unsecured investors and shareholders in Irish banks

who may fear that large writedowns would result in

bank losses in excess of current capital buffers; and

potential purchasers of Irish residential mortgage books

who also may fear wholesale write downs but will

welcome the first step towards a formal process
for working out the debts.

Possibly the most contentious point in the Draft Bill is the

extent to which secured creditors can or cannot block PIAs,
or can be squeezed out if in a minority.

Effect
Once the DRC is entered into the register a moratorium of
one year takes effect unless it is terminated or extended.
During this period restrictions are placed on the relevant
creditors ability to petition in respect of the relevant
debt or otherwise commencing any action or other legal
proceedings against the debtor for the debt. Pending actions
may be stayed. The creditor may object to the DRC or to the
debt being included therein on prescribed grounds during
the moratorium period.
Assuming the moratorium period does not terminate early
and the debtor is still unable to repay, at its conclusion the
debtor is discharged from all the qualifying debts specified
in the DRC.

Debt Settlement Arrangement

A DSA allows for settlement of unsecured debt where a
debtors liabilities are 20,001 and over.
It has no effect on secured debt.
Scope
A DSA may be proposed to two or more creditors by a
debtor with liabilities of at least 20,001, in respect of the
payment or satisfaction of his or her unsecured debts. A
DSA may only be proposed by a debtor who is insolvent and
meets certain eligibility criteria.
Protective certificate and Process
A debtor may apply to the Service for a protective
certificate, that will generally last for thirty or forty working
days, to prevent the enforcement of any personal debt while
proposals are made to reach a DSA. The application must
provide for the appointment of a Trustee.
The Trustee must gather financial information from the
debtor and prepare a proposal to be considered and voted
upon at a creditors meeting.

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Where a proposed DSA is approved at a creditors

meeting by a majority of 65% in value of actual votes2
cast at the meeting it becomes a DSA and will then be
binding on every creditor who was entitled to vote at
the creditors meeting. The DSA will be deemed to have
effect thirty days after the communication of the result
of the creditors meeting to the Service unless a creditor
enters an objection in the Circuit Court. A challenge can
be made on specified grounds, for example a failure to
follow procedural requirements or that the DSA unfairly
prejudices the creditor concerned. Failure to agree to a DSA
would terminate the process and leave the debtor open to
bankruptcy proceedings.
There are provisions for the variation or termination of a
DSA where the relevant creditors again approve by a 65%
majority as outlined above. A DSA will be deemed to have
failed after a three month arrears default once the Service
has been notified.
Effect
The DSA may involve certain specified repayment options
which will result in creditors being paid or satisfied in part
or in full over the period of the DSA. It is proposed that the
maximum duration of a DSA is to be five years, but may be
six years with the express agreement of the creditors. On
completion of the obligations specified in a DSA the debtor
shall be discharged from the remainder of the debts covered
by the DSA.
In addition, under the proposals the effect of registration of
a DSA (which takes place once it is deemed to take effect)
will be to restrict a creditors ability to petition for the
debtors bankruptcy for a debt, or enforce or recover a debt,
covered by the DSA.

Personal Insolvency Arrangement

A PIA allows for the settlement of secured and unsecured
debt where a debtors liabilities are between 20,001 and
3,000,000. The aim is to provide for a realistic alternative
to bankruptcy.
Application
An insolvent debtor who meets certain eligibility criteria
may propose a PIA with one or more of his or her secured
and unsecured creditors in respect of the payment and/or
satisfaction of his or her debts over a period of time. The
proposal is formulated and made by a Trustee.
The Draft Bill proposes a detailed list of eligibility criteria.
Amongst these is a requirement that the debtor owes a debt
to at least one secured creditor holding security over an
asset or property situated in Ireland. In addition it must be
unforeseeable that over the course of a five year period the
debtor will become solvent and a DSA would not be a viable
alternative to make the debtor solvent within a period of
five years.
Protective certificate
As with a DSA, a first step in the process is for the debtor
to apply for a protective certificate in respect of certain
2

This is not defined.

proceedings which will be in force for forty to sixty working

days. A further extension of ten working days is possible.
The Trustee must give notice to creditors of the issue of a
protective certificate and invite submissions from creditors
as to how their debts should be dealt with. The Trustee will
consider the financial circumstances of the debtor and any
submissions made in preparing the proposal for a PIA and
will summon a creditors meeting.
Terms
It is proposed that the maximum period of a PIA will
generally be six years, during which the obligations are to
be performed.
A PIA is not generally permitted to require a debtor to
cease to occupy or dispose of an interest in his principal
private residence. The Trustee is under a duty, insofar as
reasonably practicable, to formulate a proposal that will
not require the debtor to vacate their principal private
residence. The duty does not apply with debtor consent or
where the costs to the debtor of remaining in possession are
disproportionately large. Legal advice must be received in
those cases.
The Draft Bill provides a range of repayment options that
may be in a proposal for a PIA. There are also specific
provisions in respect of secured debts and also how secured
property can be dealt with. For example the principal sum
due may be reduced and payments deferred.
The specific provisions include that where the PIA requires
the sale of the property and there is a shortfall, the balance
due reduces in equal proportion to the unsecured debts
covered by the PIA and shall be discharged with them on
completion of the obligations specified in the PIA.
The proposals also include certain protections for secured
creditors so that a minimum amount is payable to secured
creditor. This aims to ensure that any write-down does not
reduce the principal below (a) the value of the security, or
(b) the amount of the debt secured thereby. It also provides
for a clawback in the event of a subsequent sale of the
property unless agreed otherwise.
Valuation of security
The value of security is to be determined by agreement
between the debtor (acting through the Trustee) and the
relevant secured creditor. Under the proposals the secured
creditors will submit to the Trustee an estimate of the value
of their security. Where the debtor or the Trustee does
not accept a secured creditors submission the debtor, the
personal insolvency trustee and the secured creditor shall
in good faith endeavour to agree a fair value for the security
having regard to any matter relevant to the valuation of
security, including a list of specified factors. In the absence
of agreement the valuation will be performed by an
independent person.
It is interesting that all secured debt (principal private
residence mortgages, buy-to-lets loans and second charges)
are all treated the same. Judgement mortgages are also
treated as secured debt. This could produce unforeseen
results in any meeting of creditors and be potentially unfair
on holders of PDH mortgages.

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Creditors meeting
The creditors must be given certain documents by the
Trustee when he or she summons a creditors meeting,
including certain statements and opinions of the Trustee
including as to eligibility.
Under the proposals, where a proposed PIA is approved
at a creditors meeting by a majority of 65% in value of
actual votes cast at the meeting of the creditors as a whole
(whether secured or unsecured) the PIA will be binding
on every creditor who was entitled to vote at the creditors
meeting. The current proposals provide that the approval
will be subject to:

the agreement of all secured creditors; or

(i) a majority of 75% in actual votes cast at the meeting
3

of the secured creditors; and (ii) a majority of 55% in

actual votes cast at the meeting of unsecured creditors.4

PIA terminated and there is a deemed failure of a PIA after

six months arrears default.
Where a PIA terminates prematurely the debtor will be
generally liable in full for all debts covered by the PIA
except in certain circumstances. An application for an
adjudication in bankruptcy against the debtor may also be
made by a creditor or debtor on the ending, termination or
failure of a PIA.

Bankruptcy
In summary, the main effects of the Draft Bill are that:

bankruptcy will only be available where a debtors

liabilities are over 20,000 in a creditors petition;

the automatic discharge period under the Bankruptcy

Act 1988 will be reduced from twelve years to three

years; and

Under the proposals the Service will receive copies of

the PIA and send one copy to the Circuit Court. Unless a
creditor enters an objection in the Circuit Court within 30
days from the communication of the result of the creditors
meeting to the Service it is provided that the Circuit Court
will make an order approving the PIA. An objection can be
made on similar grounds to those set out above in respect
of DSAs.

a court will have discretion to order a discharged

Failure to agree to a PIA would terminate the process and

leave the debtor open to bankruptcy and other enforcement
proceedings.

The Draft Bill represents a first draft of proposals reflecting

the Governments policy. Comments on the Draft Bill
can be made to the Department of Justice and Equality
by 1 March 2012. The formal drafting of the Bill itself is
to be arranged on a priority basis with the aim of it being
published by the end of April 2012, as required under the
EU/IMF Programme of Financial Support for Ireland.

The PIA will be deemed to have effect from the making of

the order and will be placed in the register maintained by
the Service.
Effect
It is proposed that where the PIA has expired and the debtor
complied with his obligations the debtor will be discharged
from the remainder of the unsecured debts covered by the
PIA. The debtor will also be discharged from the remainder
of the secured debts to the extent provided for under the
terms of the PIA.
Once deemed to have effect, the PIA will restrict a creditors
ability to petition for the debtors bankruptcy for a debt, or
enforce or recover a debt, covered by the PIA.
Currency of PIA and termination
During the currency of the PIA the Trustee has certain
functions, such as to ensure that the PIA proceeds are paid
in accordance with its terms.
A PIA may be varied with the consent of a debtor and with
the approval of creditors at a creditors meeting. The same
qualified majority and a similar process applies. In certain
circumstances an application can also be made to have a
3

Again, it will be important how vote is defined. For example, does a

subordinated creditor have the same votes as a senior creditor?

These provisions are in square brackets in the Draft Bill and therefore
there is obviously some ongoing debate how this provision will
ultimately read. It will be a key issue whether the secured creditors
have a veto or can be compelled to accept a personal insolvency
arrangement (squeezed out).

bankrupt to make payments for the benefit of creditors

for a period of five years from the date of discharge.

Next steps

Comment
The introduction of non-judicial settlement options is a
welcome step aimed at bringing a consensual end to the difficulties of those debtors who are eligible. Indeed in respect
of DSAs and PIAs (with PIAs applying to secured debt), the
proposals offer debtors options to resolve their position
while ensuring that lenders can play a part in a process
so that they can recover as much as possible. The current
uncertainty and absence of non-judicial options is helping
neither borrowers nor lenders, and is a significant source
of concern for potential purchasers of bank assets (and in
particular consumer and mortgage loans).
While creditors may vote against a DSA or PIA, the effect
of such a course of action would be to leave debtors with
the option of seeking bankruptcy, which would generally
free them of all debts in three years. In such circumstances,
a lender will be left with no guarantee of recouping its
losses and, in respect of secured property, may be left
with property that might be difficult to sell. Therefore,
in practice, the non-judicial arrangements may not be so
voluntary after all.

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Links

Further information and discussion is needed around

certain key issues, such as:

Do secured creditors have a veto or can a dissenting

minority be bound?

Will secured creditors in different classes be

treated differently?

The Personal Insolvency Bill is available here.

The accompanying press release is available here.
The Arthur Cox briefing on the Inter-Departmental
Mortgage Arrears Working Group is available here.

Contacts
For further information on any of the foregoing matters please contact any of the following or your usual Arthur Cox contact:
Cormac Kissane
Partner
+353 (0)1 618 0529
cormac.kissane@arthurcox.com

Orla OConnor
Partner
+353 (0)1 618 0521
orla.oconnor@arthurcox.com

Robert Cain
Partner
+353 (0)1 618 0246
robert.cain@arthurcox.com

William Day
Partner
+353 (0)1 618 0509
william.day@arthurcox.com

Brendan Cooney
Partner
+353 (0)1 618 0576
brendan.cooney@arthurcox.com

Dublin

Orla OConnor Partner

+353 (0)1 618 0521

Belfast

Liam Carney Partner

+353 (0)1 618 0600

Earlsfort Centre, Earlsfort Terrace, Dublin 2, Ireland

tel: +353 (0)1 618 orla.oconnor@arthurcox.com
0000 | fax: +353 (o)1 618 0618
email: dublin@arthurcox.com

Capital House, 3 Upper Queen Street, Belfast BT1 6PU, Northern Ireland
tel: +44 (0)28 9023 0007 | fax: +44liam.carney@arthurcox.com
(0)28 9023 3464
email: belfast@arthurcox.com

London

New York

12 Gough Square, London EC4A 3DW, England

Partner
tel: +44 (0)20 7832Ultan
0200 |Shannon
fax: +44 (0)20
7832 0201
email: london@arthurcox.com
+353 (0)1 618 0560

One Rockefeller Plaza, 15th Floor, New York NY 10020, USA

Kevin
Lynch
tel: +1 (1)212 782 3294 | fax: +1 (1)212
782
3295 Partner
email: newyork@arthurcox.com +353 (0)1 618 0552

ultan.shannon@arthurcox.com

kevin.lynch@arthurcox.com

www.arthurcox.com

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