Re Jacqueline Hayes and the Personal Insolvency Acts 2012-2015
The High Court gave judgment recently on an appeal of a Circuit Court Order upholding an Objection to a personal insolvency arrangement (“PIA”).
Shoreline Residential DAC (“the Objecting Creditor”), opposed an Arrangement on sustainability and unfair prejudice grounds, which provided for a term extension from 18 years to 27 years. This would have meant the interlocking debtor would be 79 upon completion of the mortgage term, an interest only term during the currency of the PIA, and a fixed rate of 3.65% over the remaining term of the mortgage (Post PIA).
The Court stated, that the legislation “does not require the Court to examine the likely circumstances of the Debtor after the six-year term of a proposed PIA, but…the Creditor is correct that a court may not, if it has the evidence before it, disregard, the likely or reasonably likely circumstances that will exist at the end of the six-year period of the PIA”.
In this case the Objecting Creditor had argued that based on the figures furnished the Debtors were likely to fall into difficulties in year 18 of the restructured mortgage, the date when the elder of the two debtors would likely retire.
Sustainability
The Objecting Creditor pointed to the fact that it was unlikely the interlocking debtor would still be employed in the security industry at the age of 79. On present figures of projected income at that point, the Arrangements showed that there would be a monthly shortfall of €279 in year 18 (the normal anticipated retiring age of the interlocking debtor). The Debtors argued the shortfall would not be that high and that if the Debtors income did not rise in that time period, they could choose to live below the RLE Guidelines (“RLE”).
The Court found that the legislation prohibits an Arrangement which includes a term that would compel debtors to live below the RLE’s during the Arrangement. However, the Court held “it does not prohibit a scheme by which the debtor might on current known figures live below the current known figures”.
In relation to the Arrangement, the Court found two issues on sustainability determinative. Firstly, the Court believed that the possibility that the Debtors may be forced to live below the RLE’s in year 18 was too remote to allow the Court properly assess it. (In other words, it was too far into the future, to say with any certainty that there would be a deficit in repayments.) Therefore, as the Court’s focus is primarily on the term of the PIA, and what is reasonably foreseeable thereafter, it rejected the Objecting Creditor’s argument on a lack of sustainability.
Unfair Prejudice and the costs of funds argument
Shoreline Residential DAC (“Shoreline”) strenuously objected to the term in the Arrangement proposed to fix the interest rate for the rest of the mortgage term as being “completely unheard of in banking practice”. An amendment to the interest rate in a proposal is specifically authorised under section 103 (6) (e) of the Personal Insolvency Acts. The Court contrasted this statutory provision in the legislation with other debt treatment options, and noted that it was not confined to the duration of the PIA. The Court concluded therefore, “the statute permits that interest rates may be fixed or variable, or linked to a reference rate, and the legislation does not limit the period of time for which this can be done.”
The Objecting Creditor, took particular exception to the duration at which the fixed interest rate was to be in operation. (i.e. the term of the extended mortgage: 27 years). It contended that there was no similar product on the market which offered such a long fixed period. The Court noted, and placed a significant emphasis on the fact, that the Objecting Creditor was not a “lender” but an investment fund, and therefore a costs of funds type argument or an argument that an interest rate needed to be somehow tied to, or tracked to an ECB rate did not arise for such an objecting creditor.
Consequently, the Objecting Creditor’s argument that the fixed rate term in the Arrangement was unfairly prejudicial was not accepted by the Court. According to the Court, the evidence given by Shoreline did “not say or suggest as a matter of fact that the objecting creditor will require a return to the market to meet its capital needs in the future or fund the investment.”
Rather, in assessing the reasonableness of any interest rate term, including a term fixing the interest rate for a long period of time, the Court stated “the test the Court engages…is not always to test the rate against the projected future borrowing needs of a mortgage lender, and in the present case the fairness of the rate is to be tested in the light of the actual circumstances of the objecting creditor”. It concluded a low fixed interest rate was not determinative of unfair prejudice for such a creditor.
In the context of this case, the Court indicated that its thinking on unfair prejudice was not governed by the factors a would-be lender would have in granting finance, owing to the fact the objecting creditor is not a lender. Instead the proposal for a fixed interest rate, needed to be tested “against the future costs of, or value to an investor not a lender.”
The Court again drew a sharp contrast between an Objecting Creditor who was a commercial lender and an investment fund. In this particular case, the investment fund Shoreline, was unable to convince the Court, that the Arrangement was unfairly prejudicial to its interest by virtue of the inclusion of a long term fixed rate of interest. In short, the factors which would make such a term unfairly prejudicial to a bank, for instance, were not present for an investment fund.
Conclusion
What makes this judgment notable, is the fact that the Court was particularly keen to distinguish investment funds from commercial lenders, in respect of an unfair prejudice argument that was largely based on the fixing of an interest rate. The Court stated, “Shoreline is not a lender, and accordingly the test of unfair prejudice regarding its interest must be seen in the light of investment returns and not the costs of the capital needs of the creditor in the future. The examination of the fairness is conducted in the circumstances of the case and having regard to the financial profile of the objecting creditor and the means of the debtor”.
Separately, the Court rejected as “conjecture” any argument that college fees for the Debtors children would cause a default in year 7 or 8 of the PIA. For the above reasons, the Court allowed the appeal of the Debtors.
For further information on this update, or for general advice in relation to Personal Insolvency matters, please contact Andrew Croughan.
