Objections to Personal Insolvency Arrangements - can a creditor’s voice be heard?

Objections to Personal Insolvency Arrangements - can a creditor’s voice be heard?

One of the legislative responses to the financial crisis is a profound change to the law on Personal Insolvency. It was felt by various stakeholders that a quicker passage through an insolvency process was both practical and socially desirable. There was also a significant concern about so called “bankruptcy tourism”, given the relative attractiveness of the regime in the UK when compared to the old rules of Bankruptcy in Ireland.  For this reason the Personal Insolvency Act 2012 was enacted. One such mechanism which indicates the new approach to insolvency is the Personal Insolvency Arrangement. It is a statutory alternative to bankruptcy, where a debtor has secured (mortgaged) debts. 

A Personal Insolvency Arrangement (PIA) under the Personal Insolvency Act 2012 brought about a totally different methodology and approach to personal insolvency akin to examinership for companies. Unlike some of the various other statutory solutions to debt depending on type and scale of debt; i.e. Debt relief Notices, Debt Settlement Arrangements, the Personal Insolvency Arrangement is only available where there is a secured creditor. 

There was significant concern that the new process enacted by the 2012 Act could effectively be vetoed by large creditors, where they had 35% or greater of the overall debt and where secured debt was involved creditors representing 50% or more of the value of the secured debt could block approval of the proposed PIA.

Court approved PIAs

The Personal Insolvency (Amendment) Act 2015, was the legislative response to this difficulty. It provides under section 115A of the Act, that where a debtor has been unsuccessful in getting creditor approval for personal insolvency arrangement he/she can apply to court for an Order under that section 115A(9), approving the coming into effect of the Proposed PIA.  This effectively is the power to overrule the large creditor veto. The Court can then make an Order confirming the coming into effect of a Personal Insolvency Arrangement. The Court must consider a significant number of criteria before confirming a PIA and it must be satisfied that there is a reasonable prospect that this confirmation will enable the debtor to resolve his or indebtedness without recourse to bankruptcy, that the creditors will recover the debts due to them to extent that the debtor’s means will allow and enable the debtor to remain in his or her principal private residence.  The balance therefore has been dramatically recast in the favour of the debtor. 

Effect of an approved or Court sanctioned PIA; Section 116

The effect of a Court approved PIA on a secured debtor are profound.  Every creditor specified in the PIA is bound by it for the duration, the creditor may not issue proceedings, prosecute the existing proceedings, enforce security or otherwise pursue debts including contacting the debtor.

This begs the question, as to what, if anything, a secured creditor can do, to object if it feels that its interests are being unfairly prejudiced by having this arrangement foisted upon them.

A Section 115A Application

Prior to a Court hearing on whether to approve a PIA, the debtor has to apply to Court for a Protective Certificate. This is an interim application and its effect is to prevent the creditors (any creditors) moving against the debtor or debtor assets for a maximum period of 110 days. It preserves the status quo while a Personal Insolvency Practitioner frames a proposal and convenes a creditor’s meeting. Section 115 A also allows a secured creditor, to object to the debtor application on a number of specified grounds, such as debtor conduct or where the PIA unfairly prejudices the secured creditor. Once a Notice by the Debtor is received, the creditor has 14 days to file a Notice of Objection with the appropriate court. Typically these objections are grounded on detailed affidavits, specifying the reasons why the creditor is objecting to the imposition on it of a PIA. The grounds of objection include that the debtor did not satisfy the fairly strict eligibility requirements, the debtor’s conduct in the preceding 2 years has been arranged with a view to becoming eligible (i.e. strategic default), there has been a material omission or inaccuracy in the paperwork, the PIA “unfairly prejudices” the interests of the creditor, or where there has been a transaction at an undervalue or a preference to a person within the preceding 3 years such that there is substantially reduced amount of money available to meet the Debtor’s debts. The creditor may also object where he or she believes that the debtor has committed an offence under the insolvency legislation which has caused a material detriment to the debtor. 

The objection and the Debtor’s case are then rolled up into one set of proceedings and heard together. They are case managed, similar to the Commercial Court with directions hearings and timetables given to the parties for the exchange of affidavits and legal submissions. They are heard by the Insolvency Judges, and for this purpose, a number of Circuit Courts are amalgamated into fewer Insolvency Circuits.  As the Courts and practitioners become more used to the new provisions, it is anticipated that there will be a significant amount of cases coming before the consolidated insolvency Courts in the Circuit Court and also the High Court. It is also anticipated that over time, the practices and principles of the Court will become more settled. For the moment, the Objection provision in section 115A of the 2015 Act represents an important safety valve for creditors against the potential for unfair prejudice of PIAs. 

For further information, contact Andrew Croughan.