Insolvency Law Update Winter 2019

Two recent personal insolvency cases in which OSM Partners acted, have added to the emerging caselaw in this area;

A recent decision of the High Court has firmly restated the law in respect of what constitutes a class of creditors.

In Re James Flynn [2019) unreported the High Court held that a single creditor who was owed fees for professional legal services was not a valid separate class of creditors for the purposes of grounding a section 115A appeal. In the above case the Personal Insolvency practitioner attempted to argue that fees owed to a solicitor’s firm was a separate class of creditor to the debtor’s other unsecured creditors. 

In order to validly invoke the jurisdiction of the Court to revisit the result of a creditor’s meeting the Act stipulates that, in order to do so, at least one class of creditors must have accepted the proposal by majority of over 50% of the value of the debts “owed to that class”. The Court found that the creation by the PIP of a “professional class of creditors” was invalid and consequently the entire application had to fail.

The Court emphasised that the existing corporate law test for what constitutes a valid class of creditor, and which has been adopted into personal insolvency law by the Re:Sabrina Douglas [2017] IEHC 785 case, was still the valid test. What is of paramount importance in assessing whether creditors can form a valid class is “the nature of rights which the creditors have against the debtor” and not how those rights arose.

In Flynn the Court was not satisfied that the debts owed to a firm of solicitors were sufficiently different in nature to be considered a “separate class” from the debtor’s other unsecured creditors who all voted against the proposal.

In a further separate decision of the High Court, the Court held in Re Mathews [2019] that an Arrangement which proposes the transfer of a joint property into the sole name of a non insolvent co borrower is contrary to section 103(2) of the Act, and thus cannot be sanctioned by a Court. In this case the debtor owned 3 properties, 2 of which were mortgaged to the objecting creditor, the 3rd to another lender.  The Arrangement involved the retention as a PPR of one of these properties and a large write down, the sale of the 3rd property and transfer of the 2nd property to the co borrower. 

Section 103(2) of the Act prohibits a write down of secured debt below the value of the secured property. As the Debtor’s liability for the 2nd property was effectively being extinguished, this infringed section 103(2) and the Arrangement could not be sanctioned. This case is an important guide to parties trying to deal with the debts of co-borrowers separately and sets out the limits of such treatments in the context of personal insolvency.

For further information on these judgments or any aspect of personal Insolvency, contact Andrew Croughan, Partner and Head of Personal Insolvency in OSM Partners.