CHECK AGAINST DELIVERY

Personal Insolvency (Amendment) Bill 2014

Second Stage – Seanad Éireann

 

Speech by Minister of State Aodhán Ó Ríordáin, T.D.,

on behalf of the Minister for Justice and Equality, Frances Fitzgerald T.D.

16 July 2015

A Chathaoirleach,

I am very pleased to be before you today to present this Bill, which provides for important changes to the Personal Insolvency Act 2012, arising from the Government’s initiative of 13^th May to strengthen support for people in mortgage arrears. Minister Fitzgerald cannot be here as she is currently dealing with legislation in the Dáil.

Overview of key changes

The main reform contained in the Bill is the new provision for independent review by the Courts where a proposal for a personal insolvency arrangement (PIA) including arrears on the borrower’s home mortgage has been refused by creditors.

Senators will recall that a PIA is the debt solution provided under the Act for dealing with secured debt such as home mortgages, and that while respecting the rights of creditors, the PIA provides significant statutory protections for the debtor. These include keeping the debtor in their home where reasonably possible, the right to a reasonable standard of living while insolvent, and protection against any unilateral changes to the arrangement.

Those statutory protections - which were debated at length by the Oireachtas – are not necessarily available to a borrower who enters an informal arrangement with their lender, or who enters bankruptcy. That is why effective and early access to a PIA, where feasible, is an option of central importance for people struggling with long-term mortgage arrears.

The new Court review is a key reform, designed to ensure that fair and sustainable debt restructuring proposals are upheld for borrowers who want to work their way out of debt with a view to keeping their homes. It will protect distressed mortgage-holders from any unfair lack of co-operation by their banks, while respecting the legal rights of creditors. In particular, it will ensure a better balance between the interests of secured lenders, and the interests of those facing unsustainable mortgages.

It will also be accompanied by flanking support and information measures, aimed at ensuring that those in serious mortgage debt can access practical help quickly and effectively.

The second important proposal in the Bill is to increase the level of debt which may be included in a Debt Relief Notice from the current limit of €20,000 per person, to €35,000. Senators will recall that a Debt Relief Notice, or DRN, is the debt solution provided under the Act for an insolvent person who is on a very low income, who doesn’t own a property or any significant assets, and is weighed down by debts which they have no prospect of being able to pay. Another amendment removes a possible bar which might prevent a home owner who has entered a mortgage restructure from accessing a PIA if the restructure proves unsustainable.

The third important element in this Bill provides more detailed powers for the Insolvency Service of Ireland (ISI) in relation to promoting awareness and understanding of matters related to personal insolvency and bankruptcy, and providing information and analysis on their operation in practice. Other provisions develop the ISI’s supervisory powers regarding personal insolvency practitioners, in line with best practice regulatory standards.

Finally, the Bill contains a number of technical amendments of a prudential or clarifying nature, which I will come to later in my remarks.

By way of background to the new Court review I would like to return to the broader context of insolvency policy and its interaction with the wider-still question of mortgage arrears.

Senators will recall that the Statement of Government Priorities 2014-2016 underlined that high levels of personal debt continue to threaten to exclude thousands of individuals and families from the economic recovery.

In its Report on Mortgage Arrears last July, the Joint Committee on Finance, Public Expenditure and Reform referred at recommendations 46 and 47 to concerns about the potential costs of personal insolvency solutions, noted ‘the public refusal of some financial institutions to engage in any writedown of secured debt’, contrary to the Government’s policy in enacting the insolvency legislation, and recommended that the insolvency legislation should be reviewed to mitigate against such a practice.

I’m pleased to say that Minister Fitzgerald was able to respond on the issue of fees and costs, by providing for a complete waiver of all fees payable to the Insolvency Service or the courts in respect of insolvency applications, with effect from last October.

On the issue of engagement by financial institutions, Senators will remember that the Taoiseach, the Tánaiste and Minister Fitzgerald met with the Insolvency Service and with insolvency practitioners in early February this year, and that the Taoiseach spoke publicly after that meeting about the need for banks to cooperate more effectively with the personal insolvency regime.

In Minister Fitzgerald’s Second Stage speech before the Dáil on this Bill, last February, she welcomed the gradual increase in the number of applications for personal insolvency solutions under the Act. But she added that she wanted to see a more fundamental change in the overall number of solutions reached under the Personal Insolvency Act.

The ISI statistics for Q2/2015 show 384 new PIA applications and 146 concluded PIAs during that quarter, with both rates continuing to increase steadily. However, these numbers remain very small compared with the numbers in serious mortgage arrears. The proportion of PIA proposals approved by creditors is also increasing, and stands at 73% for Q2/2015. Nevertheless, there remains persistent evidence that some secured creditors have an acknowledged policy of refusing to consider PIA proposals or wide categories of PIA proposals despite an apparent commercial rationale, and that consequently no proposal is ever made in many cases which would otherwise be considered as suitable.

This is a serious concern and the need for the new Court review arises against this overall background.

Over the past year we have seen a very welcome decline in the number of home mortgages which are in arrears, and particularly in those in short-term arrears. On the other hand, some 38,000 PDH mortgage accounts remain in long-term arrears (exceeding 720 days). This substantial group is a source of major concern, as they are likely to be at imminent risk of losing their homes to repossession. The latest Central Bank statistics suggest a slight recent reduction, but we will need to see these a very significant fall in these numbers over the coming year.

There has also been a significant increase in the number of mortgages which were formerly in arrears, but which have been restructured by an agreement between the mortgage lender and the borrower. However, a cautionary note also has to be sounded regarding a proportion of these informal mortgage restructures which may not be sustainable, and where the borrower has not been returned to solvency and risks falling back into arrears.

There has also been extensive public debate and concern about recent increases in the number of repossession proceedings issued against borrowers’ homes. While the number of actual repossessions remains low, it is a core Government priority that repossession of a borrower’s home should remain an option of last resort.

Obviously, not all insolvent debtors are suitable for a PIA. Each case must be assessed fairly on its own facts. There will be cases where the borrower does not have the financial capacity – even with mortgage restructuring – to make the necessary level of repayments. Such cases cannot be resolved via personal insolvency legislation, and will need alternative solutions such as expansion of the Mortgage to Rent scheme.

In tandem with this reform to the Personal Insolvency Act, the Government is coordinating intensive work across all relevant Departments and agencies, to deliver on the wider elements of the mortgage arrears initiative including:

arrangements to deliver assistance and advice through MABS and ISI in the Courts when repossession actions are taking place,

enhanced and expanded arrangements for mortgage to rent, and

a nation wide information and publicity campaign aimed at assisting those in serious mortgage arrears to engage with their lenders and with the Courts where repossession proceedings have been initiated, coupled with an undertaking that, when they do engage, coordinated services will be there to assist them.

The access and support measures are being implemented across the system at present, and will be in place for September.

I turn now to the specific measures contained in the Bill, and first of all to the new court review.

1. The new Court review

This is contained in Section 21 of the Bill.

Currently, under the Act, a proposed PIA is voted on by the creditors and must be approved by the necessary majorities of secured and unsecured creditors. If the creditors reject the proposal, there is no provision for a review or appeal.

The new court review will change this situation.

It applies to a PIA proposal which:

- has been rejected by creditors,

- includes a mortgage on the borrower’s home,

- and that mortgage was in arrears on 1 January 2015 – or is a restructure of arrears from before that date.

The date of 1 January 2015 is to avoid any negative impact on new mortgage lending. The proposal focuses on home mortgage arrears both due to the priority of this particular group, and because the public policy issues arising in this context provide a particularly strong justification for rebalancing the rights of secured creditors.

The PIP who prepared the proposal must confirm there are reasonable grounds for a review and that a majority of one class of creditors has voted for the proposal. This requirement for an element of creditor support reflects the approach used in company examinership, which was already signalled in the Government announcement on 13^th May. However, it is not limited to the classes (secured debt, unsecured debt, overall debt) which voted at the creditors’ meeting. It is a much lower and more flexible requirement.

In the context of a Court review, a ‘class of creditors’ is widely defined and may consist of a single creditor, or of more than one creditor with similar interests. This flexible test will facilitate finding a solution which is fair and reasonable for all concerned, as it does in examinership, and the Court will ensure that it is applied fairly.

The Bill also provides for a significant exception to the creditor support requirement. In many cases involving a mortgage, the borrower has consolidated their debts with a single creditor. In these ‘sole creditor’ cases, if the sole creditor refuses the PIA proposal, the debtor will not have to show any creditor support before seeking a Court review.

This exception effectively opens up the whole PIA process to a large number of cases where until now, no PIA proposal has even been made, as it was felt that the sole creditor would be unlikely to agree to a deal offering statutory protection for the borrower.

The Court in reviewing the proposal will consider whether it:

- allows the borrower to stay in/keep their home if reasonably practicable, and the costs are not disproportionately large (see s. 104 of the Act)

- gives a reasonable prospect of restoring the borrower to solvency while repaying the creditors to the extent that the borrower’s means reasonably allow,

- it is reasonably likely to be one the borrower can comply with, given their financial circumstances and (if relevant) the conduct of borrower and lender regarding repayment of the debt in the previous 2 years

- is fair and equitable to each class of creditors affected,

- is not unfairly prejudicial to any interested party, and

- has been accepted by a majority of one class of creditors (which may consist of a single creditor or of more than one creditor with similar interests) (Same flexible test as already explained: again, this element is not needed if the debtor has only one creditor.)

These criteria have been carefully designed to ensure that the review process takes full account of the situation and rights of both the borrower and the creditors, while also taking account of the public interest in restoring insolvent borrowers to solvency, enabling creditors to recover debts to the extent that the debtor’s financial situation reasonably allows, and keeping people in their homes where that is reasonably practicable.

The new Court review will generally be heard by the specialist Circuit Court insolvency judges (in the High Court only where debts exceed €2.5 million), and delays are not expected.

This new review is a major reform which represents a ground-breaking shift from the current position, and will significantly rebalance the position of creditors and debtors to ensure fair and balanced outcomes for both.

2. Wider eligibility for a Personal Insolvency Arrangement and for a Debt Relief Notice

Section 12 of the Bill removes a potential bar to some insolvent borrowers being able to make a PIA proposal. It relates to people formerly in mortgage arrears on their homes, who have entered an agreement to restructure their mortgage.

Under section 91(1) of the Act, a borrower must co-operate with the mortgage lender under the MARP process approved by the Central Bank. If the borrower does so, but is not able to agree a restructure with the mortgage lender, he or she is then eligible to propose a PIA.

The question has arisen, however, as to eligibility where a borrower has co-operated with MARP and has entered a (MARP or non-MARP) restructure, but the restructure has failed, or is unsustainable. It is clearly important that such a borrower can make a PIA proposal, and the amendment clarifies that they may do so if they have tried in good faith to comply with the restructure but remain insolvent.

A Debt Relief Notice (DRN) is a debt settlement measure under the Act limited to an insolvent person whose net disposable income after Reasonable Living Expenses is less than €60 per month, and who has assets of €400 or less (excluding basic household goods or tools, and a car worth €2,000 or less). Currently, the person’s debts may not exceed €20,000.

Section 3 of the Bill proposes to increase this limit to €35,000 per person. This amount has regard to the experience of MABS, which acts as the PIP equivalent for DRNs under the Act, that the amount of debt held by applicants otherwise eligible for a DRN is commonly up to €35,000. This change will, I believe, open up the DRN solution to a significant number of people who are not able to benefit from other statutory arrangements and whose debts, while relatively small, exceed the current limit.

3. More detailed powers for the Insolvency Service

Section 2 of the Bill expands the important functions of the Insolvency Service regarding information, awareness-raising and communication in personal insolvency and bankruptcy matters.

Sections 23 to 26 of the Bill provide more detailed and effective powers for the Insolvency Service to supervise the activities of Personal Insolvency Practitioners (PIPs).

The Act already provides powers for the ISI to intervene if there is a complaint, or other reason to check for any misconduct or non-compliance by a PIP with their duties under the Act (a ‘reactive’ power, carried out by Inspectors whose functions and powers are already provided in the Act).

However, it does not provide in the necessary detail for a proactive supervision power which would allow for routine inspection without any suggestion of misconduct. This is already the best practice standard for equivalent regulatory bodies and Minister Fitzgerald considers it appropriate, given the important statutory functions of PIPs. The Bill therefore provides for ISI to appoint Authorised Officers who will carry out the proactive supervision function, with the appropriate powers.

4. Technical amendments

Finally, a word on the technical amendments in the Bill. I remind Senators that these clarify the existing rules for creditor voting but that where a PIA proposal is rejected by creditors, the new court review will now be available.

Their first objective is purely prudential and relates to a possible ambiguity identified in the wording of two sections of the Act, specifying the majority of creditors required to approve a DSA or PIA proposal at a creditors’ meeting.

The intention of the legislation, and the interpretation applied by all stakeholders in practice, is that such a proposal can be approved by creditors holding a specified majority of the overall debt. However, legal advice raised a possibility that the wording of sections 73 and 110 could be open to an alternative interpretation that in addition, the proposal must also be approved by a majority in number of all creditors, both for a DSA and for a PIA.

Such an interpretation was never intended and would make it unnecessarily complicated to secure agreement on proposals. The relevant amendments remove the ambiguity and put the intended meaning beyond doubt.

Their second objective was to clarify the detailed procedures which apply where creditors are deciding on a debtor’s DSA or PIA proposal. Normally the decision is taken by a vote at a creditors’ meeting (the ‘standard scenario’), for which the Act sets out detailed procedures regarding notice, time limits, etc. But the Act also provides for two alternative scenarios:

- where only one creditor is entitled to vote at a creditors’ meeting (‘sole creditor scenario’). In this situation, the creditor may notify its decision without the need to hold a creditors’ meeting.

-where a creditors’ meeting is held but no creditor votes (‘no-vote scenario’). In this situation, the debtor’s proposal is deemed to be accepted by the creditors.

The Act does not always specify how the detailed procedures set out for the standard scenario would translate into the two alternative scenarios. The amendments clarify how that would be done.

ENDS.