New Challenges Facing Secured Creditors in Section 115A Applications

The recent decision of the High Court in Re Fetherstone [2018] IEHC 683 complicates a creditor’s assessment of debtor conduct in evaluating Personal Insolvency Arrangements. In this case the Debtor’s poor repayment history in the 2 years prior to the issue of the Protective Certificate, was pleaded by the creditor as being a strong and compelling argument against granting the relief under section 115A of the Act. Under section 115A (10) of the Act the Court is obliged to consider the Debtor’s conduct in seeking to pay the debts concerned in the 2 years prior to a protective certificate. The Act specifically refers to conduct in the context of repayments made and the conduct of the creditor in seeking to recoup payment. However, unlike subsection 9, this section does not mandate a Court to refuse a PIA where there has been poor repayment history. Instead, it requires the Court to include repayment history in its overall considerations.

In the Fetherstone case, the Debtor had not made any payment in the 13 months prior to the issuance of the Protective Certificate, in circumstances where the Debtor’s business appeared to be becoming more profitable in the same time period. The Court stated it is “incumbent upon the debtor to explain why debts were left unpaid”. The Court described the Debtor’s explanation of the poor repayment history as “entirely inadequate…the debtor has failed to place any sufficient evidence before the court to explain why his payment record was so poor”.  The Court further stated “the failure of the debtor to properly explain himself weights heavily against the grant of relief under s.115A”. 

Nevertheless, and somewhat surprisingly, given those strong observations, the Court, did not believe the poor repayment history was of itself the sole determinant of the Court’s analysis.  The Court found some other factors were more important to the Court than the poor repayment history, such as the Debtor’s improving business, which ensured the Arrangement was sustainable, and the fact that in the creditor did not raise a complaint to the PIP about poor repayment history in its dealings with the PIP following the issuance of the Protective Certificate and indeed was prepared to make a counter offer to the PIP, as an alternative to the PIA. The Court also noted that the unsecured creditors would do better in the PIA when compared to bankruptcy. 

It would appear therefore, that while a secured creditor is not precluded from using poor repayment history to point to a conduct argument as to why an arrangement should not be granted, it will be essential to raise this in correspondence with the PIP at the very outset and certainly prior to the vote of the creditor’s meeting. Raising it for the first time, during a section 115A will not be sufficient to persuade a court not to grant the relief sought.

Meanwhile, secured creditors will also have to contend with a very recent decision of the High Court in Re Parkin [2019] IEHC 56, which appears, to further undermine the prospects of including debt warehousing as a feature of debt restructure. In the Parkin case the Court, excluded the Debtor’s pension from any assessment of whether a warehousing component was affordable.  In this case, it was the secured creditor’s position that a warehouse was affordable for a number of reasons, including the existence of a pension which would become payable to the Debtor within the lifetime of the mortgage. The Court disagreed and ruled that section 51 of the Act applied to the pension.  Section 51 states pensions are not reckonable unless they become payable within the life of an Arrangement. 
In the Parkin case, the Court felt that as the Debtor was not going to reach retirement age within the currency of the PIA, that the pension would, therefore not become payable. Consequently, no account could be taken of it, in assessing the Debtor’s affordability.  This has potentially far reaching ramifications for secured creditors who now appear, for the time being at least, to be precluded from including a debtor’s pension in their analysis of affordability.  The warehouse had been proposed by the secured creditor as an alternative to a very large up front write down.  The Court, while stating that any write down must be proposed with reference to affordability and be “objectively justifiable”, approved the Arrangement which contained a write down to the section 105 Valuation. There is some comfort in this for secured creditors, in that they should no longer be subject to the arbitrary write down to the current market value of the secured property. Rather, any proposed write down will be assessed strictly on the basis of the Debtor’s affordability.

This ought to, in time, lead to a change in the practices of the PIP’s, a large number of whom have taken to arbitrarily writing off all the negative equity of a property in an Arrangement. It had become an all too common feature, that the PIP’s assessment of affordability exactly matched the valuation of the property.  So, while the issue of debt warehousing will pose challenges to secured creditors in reviewing Arrangements and preparing counter offers, there is simultaneously some comfort that debt write downs to the value of the secured property will become a thing of the past. 

For further information, please contact Andrew Croughan, Richard O'Sullivan or your usual contact in OSM Partners LLP