There was a lot of media coverage this week around the issue of warehousing of debt, in the context of Personal Insolvency Arrangements. However, immediate concerns that that the decision of Ms. Justice Baker in Re Paula Callaghan and the Personal Insolvency Acts 2012-2015, casted doubt on warehousing per se, are overstated, writes Andrew Croughan, Associate in OSM Partners.
This case concerned a Section 115A appeal of a Circuit Court Order affirming a PIA for the above debtor and her husband, which was taken by the Objecting Creditor, KBC Bank. The case attracted media attention as the Bank’s attempt to oppose an Arrangement, which it argued was unfairly prejudicial to its interests, was framed in certain media reports as a repudiation of warehousing or debt deferral per se.
However, upon careful, scrutiny of the Judgment a more nuanced picture emerges. The Court, while, rejecting the particular Counter Proposal of the Bank in this case, which did include a significant element of warehousing, the Court affirmed that “there are no limitations in the statutory provisions as to the conditions that may be included in a restructure of a secured debt…there is nothing in ss 99 or 100 of the Act, which precludes the splitting of the mortgage debt and the warehousing of part of the debt”.
Furthermore, In considering section 102 of the Acts, which contains a non exhaustive list of debt treatment options open to Personal Insolvency Practitioners, the Court stated “the fact that warehousing of the type and for the time proposed is not found in the list of options outlined in s.102 (6)(d) does not mean that the proposal is not permitted by statute”.
The warehousing element in this case, was not contained in the PIP’s Personal Insolvency Arrangement, but rather in the Bank’s Counter Offer made under section 98 of the Act. The debt deferral proposal contained in the counter proposal was nearly 48% of the entire debt and envisaged a warehousing arrangement which was many years into the future. This necessarily created a degree of speculation as to the possible future income of the Debtors and sustainability of the counter proposal.
Easing Creditor’s Concerns
The Court in analysing the particulars of this case, made a few important conclusions, which temper some of creditors’ concerns. Specifically, the Court rejected, at paragraph 55 of the Judgment, the Debtor’s arguments that the warehousing of part of a debt may not be deferred outside or beyond the period of the PIA (usually 72 months), stating after a careful analysis of the statutory provisions of ss 99,100,102, 103, and 115A of the Act, that “I reject the argument of the debtors that the statutory scheme precludes a PIA that makes provision for warehousing part of a debt to be treated outside the period of the PIA”. The Court went on to expand upon this, by stating further in the Judgment that “whether a proposal by a creditor for long-term warehousing is one that may reasonably be rejected without risk of being characterised as unfairly prejudicial will depend on all of the circumstances. “ (emphasis added).
Therefore, what the Court is saying that in any case it will have to look holistically, on a case by case basis, at whether all the requirements it is obliged to consider under the Acts have been met, in order to decide to sanction a PIA or not. Beyond the statutory considerations set out in section 115A (9) and (10), the Court has previously held that it must assess the proportionality of the proposed Arrangement in the context of any counter offers made by creditors. The difficulty encountered, by the Court in the present case, was being persuaded about the merits of a warehousing option, in circumstances, that were very far into the future, and due to the warehoused portion’s size relative to the overall debt and income of the debtors, had the potential of creating a situation of insolvency at the time when the warehoused portion fell due to be paid.
According to the judgment, whether warehousing is assessed by a Court, to be a viable part of an Arrangement, will depend upon a detailed analysis which affirms that, on “present or known figures” it will offer a solution to indebtedness that is likely to be achieved.” In the facts of this case, there was no known material change in the Debtor’s projected income into the future, at the time the warehoused amount would become due, such as a pension or other lump sum payment, the Court assessed that the Bank’s Counter offer could lead to future insolvency. Therefore the lesson to be drawn from the perspective, of creditors, is that a careful analysis by the Bank of a possible warehousing component, needs to be undertaken, which shows, that the warehouse will lead to a better return than an immediate write down, and make a stronger argument as to why, or on what basis a warehoused portion will be sustainable. The practical effect of this is to switch the burden of proof onto the creditor, to justify the warehouse, rather than leaving the full onus on the Debtor to prove the viability of an Arrangement. The net result will be greater scrutiny on warehousing components and that warehousing, while still permissible under the Acts, may be appropriate in fewer cases.