Paul Joyce is Senior Policy Analyst with FLAC.
The recent decision of the High Court in Re: Callaghan, a debtor provides further evidence that the Court is intent on exploring the parameters of the Personal Insolvency Act 2012 (as amended) to ensure that effective resolutions can be put in place for insolvent debtors in mortgage arrears where permissible. This case is the sixth judgment of the Court this year and although by no means all have gone in the debtor’s favour, it has been useful to see both the boundaries and the objectives of the legislation drawn out in some detail for the guidance of insolvent debtors, creditors and practitioners alike.
The Act commenced in practice in autumn 2013 and was very slow to get off the ground, as many had predicted it would be. It originally took a standard approach to the approval of insolvency arrangements by providing that a sufficient threshold of creditors must vote in favour of any proposal. This ‘creditor veto’ allowed for the rejection of proposals no matter how reasonable they might have been in the financial circumstances of the case, with the insolvent debtor having no right of appeal against an unreasonable refusal. The low number of approved arrangements finally led to reform and in the Personal Insolvency (Amendment) Act 2015, a limited right of appeal was introduced from early 2016. This right of appeal only applies in the case of a Personal Insolvency Arrangement (PIA) and not in the case of a Debt Settlement Arrangement (DSA). The key difference between these two mechanisms is that the former includes secured debts and unsecured debts (if any); the latter deals with unsecured debt only.
A number of other conditions must be met before an appeal can be brought. These include that the debtor concerned must be in arrears on a mortgage on his or her principal private residence as of January 1 2015 or already in an agreed alternative repayment arrangement with the lender on that date. One ‘class’ of creditor (generally either secured or unsecured creditors) must also have voted in favour of the proposed arrangement. The Personal Insolvency Practitioner (PIP) making the proposal on the debtor’s behalf must also consider that there are reasonable grounds to appeal. The appeal is to the Circuit Court and legal aid is generally available to the insolvent debtor through the ‘PIA Legal Review Service’ element of the State’s ‘Abhaile’ scheme. A number of Circuit Court rulings have in turn been appealed to the High Court and the Callaghan case is the latest available judgment.
This case concerned a couple with three children whose insolvency originally arose from illness and unemployment respectively but where one had recently secured Invalidity Pension and the other had found work. At the time of their application, the total amount owed on the mortgage was over €285,000 and the current market value of their home was agreed to be €105,000. The couple made so called ‘interlocking’ PIA applications to run for the full six year term allowed under the legislation. These proposed that the mortgage on the family home be written down to €120,000 (€15,000 above the current market value) and that the remaining €165,000 would be written down. This would then rank as an unsecured debt and would receive a dividend over the duration of the arrangement, with the balance written off at its conclusion, leaving an affordable mortgage as the couple’s only outstanding debt. It also proposed an interest rate reduction from 4.5% to 2.5% for the duration of the PIA.
The secured creditor, KBC Bank, rejected this proposal arguing that it was not fair and equitable and was unfairly prejudicial to its interests. On appeal, the Circuit Court affirmed the proposed PIA and KBC in turn appealed that decision to the High Court. Its counter proposal was a ‘split mortgage’ that would see the mortgage balance of €285,000 written down to €270,000 and this would then be divided into two equal parts – €135,000 to be serviced over the remaining 23 years of the mortgage and €135,000 to be warehoused with no interest to be charged on it. Although whatever might remain of this warehoused portion would then in theory be due and owing at the end of the term, KBC proposed that the couple would be given a right of “lifetime tenure” in their home with KBC’s security not to be enforced until after the survivor of them died.
On appeal Ms Justice Baker accepted that the counter proposal submitted by KBC was one that the Insolvency Practitioner was statutorily obliged to consider. She then analysed in some detail a question that has been occupying the minds of practitioners for some time – whether a split mortgage can be validly incorporated into a PIA proposal when that split mortgage will generally outlive that PIA by a number of years. In summary, she concluded that it could, finding that the scheme of the legislation affords a broad discretion in a PIP to formulate proposals for the restructuring of debts on a principal private residence in such a way that ownership or occupation by the debtor is protected.
On the competing debtor and secured creditor proposals, she found that a creditor’s counterproposal does not displace the arrangement proposed by a PIP and that a test of reasonableness requires the court to look to questions of fairness or proportionality to all parties when considering unfair prejudice. KBC argued that the proposed PIA would not enable it to recover its debt to the extent that the means of the debtor reasonably permit and that a greater return would ultimately be achieved by its counterproposal. Ms Justice Baker was, however, “not satisfied that the objecting creditor has shown by evidence that the proposal offers it a better return, albeit superficially the counterproposal provides a greater monetary return than the immediate write-down of more than half of the secured debt” and was “not satisfied that the PIA is unfairly prejudicial on account of failing to fully bring into account hypothetical or future means, for which there exists no present expectation”.
Ultimately, she concluded that “while the counterproposal made by KBC may seem attractive and to some extent benevolent, it is capable of creating circumstances amounting to insolvency at the end of the mortgage term in approximately 23 years’ time”. In preferring in this case the comparative certainty of the PIA now as opposed to the split mortgage into the future, she found that the repayment of the lump sum in the warehouse was not predicated on any anticipated ability to pay and was entirely on hazard and that this was not reasonable or fair to the debtors.
Click here for the judgement in Re: Callaghan, a debtor.