A recent decision of Mr. Justice Sanfey in the High Court, In the Matter of the Personal Insolvency Acts and John and Sheralyn McEvoy  IEHC 380, has provided some much welcome clarity on the requirement that a PIP cannot bypass a secured creditor’s consent in a personal insolvency arrangement, in a scenario where a debt for equity swap is proposed, regardless of whether the property itself is in positive or negative equity.
Prior to this decision, there had been some uncertainty as to whether a PIP could bypass the statutory requirement for a secured creditor’s consent in proposing a debt for equity swap, on a secured debt which was in positive equity. This case in addition to the prior High Court case of
Typically, these type of proposals have suggested that a bank or other secured lender take an “equity” in a person’s property in exchange for a large write down of the secured debt. Banks and lenders have been understandably nervous and sceptical in participating in such schemes as they tend to be considerably less certain in terms of outcome, than the normal lending arrangements they are familiar with. In addition, such arrangements impose an undesirable and burdensome level of administration many years into the future, even beyond the lives of the debtors, in trying to give effect to that “equity”. For these reasons, banks and lenders have tended to vote against proposals that include these terms as they are excessively onerous and uncertain.
In this particular case, the PIP invited the Court to interpret provisions of the Personal Insolvency Acts as not mandating the consideration of the secured creditor’s consent. The issue was presented to the Court as follows:- “Whether, irrespective of whether the Proposed PIA will in fact operate to grant a share in the debtors’ equity in the PPR to EBS within s.102(6)(f) of the Act, the Proposed PIA offends the provisions of s.103(2) of the Act and is therefore un-approvable under s.115A.” The PIP had urged the Court to adopt a purposive approach to the construction of the Act as regards the relationship between s.102(6) and s.103(2). (Section 102 set out what PIPs may include in a PIA.)
The PIP argued that in the debt for equity swap scenario the Act, to achieve a logical purpose, must be read that section 102(6)(f) is an exception to the rule in 103(2) or alternatively the debt for equity proposed is not a true reduction under section 103 (2). Neither of these arguments were accepted. The equity was not part of the loan balance but rather was the quid pro quo offered by the Debtor. In that sense, the write down below the market value was a breach of section 103(2) of the Act.
The PIP expanded that by way of clarity, it appeared (on one reading) that section 103(2) was an unintended de facto veto of every debt for equity case, and thus inhibited any 115A for any debt for equity case.
The Court acknowledged that the consent requirement may indeed be a veto to debt for equity proposals, but rejected the PIP’s overall submission that the Court could discard section 103(2) in the manner suggested, and instead held in favour of the secured creditor that had argued that there was no ambiguity in the Act regarding the requirement of creditor support for such a proposal.
The appeal process under Section 115A, which is the process by which a debtor can appeal a rejection by his or creditors, could not override the obligation to obtain creditor consent in accordance with section 103(2) of the Act. The Court cited with approval the earlier decision of Re Denise Lowe IEHC 104 that “it was not possible…to construe s.102(6)(f) as overriding or in any way taking precedence over the requirements of s.103(2)…[T]he court is given no discretion under s.115A to override the requirements of s.103(2). On the contrary, the court is not permitted to even consider an application under s.115A (9) unless it is satisfied that the mandatory requirements referred to in s. 99 have been complied with.” This decision now firmly copper fastens the requirement for creditor consent in any debt for equity proposal made by a PIP irrespective of whether the property in question is in positive or negative equity.
To discuss this decision in more detail, or any other aspect of corporate or personal insolvency, please contact Andrew Croughan.