I move: That the Bill be now read a Second Time.
Cathaoirleach,
I am pleased to present the Personal Insolvency Bill 2012 to the House.
This is a very significant Bill which provides for comprehensive reform of
insolvency law and practice. It provides for new, more flexible options to
address the circumstances of insolvent debtors. It both provides
alternatives to and reforms judicial bankruptcy. The Bill addresses the
obligations of debtors and the rights of creditors in a proportionate and
balanced way, having regard to the financial reality of individual
circumstances.
The development of modern insolvency law is a key commitment in the
programme for Government. It was also required by the terms of the
EU-IMF-ECB programme of financial support for Ireland. A significant
contribution made by the Law Reform Commission in its Report of December
2010 on Personal Debt Management and Debt Enforcement. This Report and
earlier work were of considerable assistance in the formulation of the
Bill. The reform also has regard to the recommendation made in the
Interdepartmental Working Group on Mortgage Arrears report of October 2011,
known as the Keane Report.
The general scheme of the Bill was published for consultation by the
Government on 25 January on this year. Several important submissions, in
particular, the Report of the Joint Committee on Justice, Defence and
Equality, were received in response and taken into account in the
finalisation of the Bill. I thank all of those persons and organisations
who provided my Department with valuable comments and insights. While the
primary architecture of the Bill remains the same, considerable development
of the individual provisions in terms of legal and technical detail has
taken place.
The Bill provides for the comprehensive reform of personal insolvency law
and will introduce three new effectively non-judicial debt resolution
processes. The Debt Relief Notice which will allow for the write-off of
qualifying unsecured debt up to €20,000, subject to a three year
supervision period. The Debt Settlement Arrangement provides for the agreed
settlement of unsecured debt, no limit is involved, normally over five
years. The Personal Insolvency Arrangement will enable the agreed
settlement of secured debt up to €3 million, although this cap can be
increased with the consent of all secured creditors, and unsecured debt
without limit normally over six years.
To protect the constitutional rights of all parties concerned and prevent
potential actions for judicial review, the Bill makes provision for
enhanced oversight by the Circuit Court, or the High Court where the debts
concerned are in excess of €2.5 million, of the three new debt resolution
processes.
The Circuit Court will receive the debtor’s case file from the Insolvency
Service with an application for a Debt Relief Notice, or a protective
certificate in the case of a Debt Settlement Arrangement or Personal
Insolvency Arrangement. The court’s consideration or hearing will take
place on an ex-parte basis, neither debtor nor creditor will be required to
be present and thus no time delays or costs are incurred. This efficient
procedural approach is repeated at the conclusion of the three year
supervision period for the Debt Relief Notice or on the conclusion by the
parties concerned of a successful Debt Settlement Arrangement or Personal
Insolvency Arrangement proposal prior to its formal registration. I expect
that this proposed scenario will allay any fears that persons would become
tied up in expensive and time consuming court hearings. That should not be
so. However, a court hearing could be necessary where a creditor objects on
one of the grounds specified in the legislation. This approach is
consistent with that recommended by the Law Reform Commission.
This enhancement of court involvement in the new debt resolution processes
will have the significant benefit to the debtor of providing protection
from enforcement actions by creditors, either during the negotiation period
when a protective certificate will be in place or during the lifetime an
arrangement. It is likely that a number of debtors would be the subject of
judgments obtained by creditors. Such protection from enforcement action
could not be provided by a non-judicial agency alone. In addition, the
involvement of the court also ensures our new processes will be capable of
meeting the criteria in regard to the European Union insolvency
regulations. This is a matter of some importance where cross-border debts
are involved.
The Bill will very much continue the reform of the Bankruptcy Act 1988
which I began in the Civil Law (Miscellaneous Provisions) Act 2011. The
critical new provision is the introduction of automatic discharge from
bankruptcy, subject to certain conditions, after three years in place of
the current 12 year arrangement.
The Insolvency Service of Ireland is in the process of being established to
operate the new insolvency processes and to provide a focal point for the
future development of insolvency policy. Organisational planning for the
new service is now well under way in my Department. The Director-Designate
of the Service, Mr. Lorcan O’Connor, was appointed last month. However, as
the Service will administer a completely new approach to insolvency in the
State, with innovative and complex legal provisions, it will require time
to become operationally ready. I expect that the Service will be in a
position to commence operation in the first quarter of 2013. While I
recognise the concerns of those who want an immediate introduction, I must
ensure that all necessary procedures are in place for the Service to
commence operations.
I expect a significant number of persons to seek to avail of the new or
reformed insolvency processes. However, it is difficult to be precise as it
will very much depend on individual circumstances and the nature and extent
of the debts involved. However, for broad planning purposes for the first
full year of operation of the new law and systems, our tentative estimate -
based on a rough extrapolation from the comparable UK and Northern Ireland
circumstances – is: 15,000 applications for the two main non-judicial debt
resolution processes – the Debt Settlement Arrangement and Personal
Insolvency Arrangement; 3,000 to 4,000 applications for Debt Relief
Notices; and 3,000 bankruptcy applications. There were about 30 bankruptcy
adjudications in 2011. This number gives an insight into the contrasting
increase in work that will arise on the implementation of this Bill.
Senators will appreciate that these estimates for debtors seeking to avail
of the new arrangements are tentative. Not all insolvencies will require to
be dealt with under the new statutory debt resolution processes or
bankruptcy. I would expect that the certainty brought to the future legal
landscape by this Bill will encourage debtors and creditors to agree
bilaterally on alternative solutions. These solutions could involve
settlement of mortgage debt under the mortgage arrears resolution process
operated by mortgage lenders under the supervision of the Central Bank or
otherwise.
The provisions of this Bill will require careful consideration by all
potentially concerned therewith. However, individual circumstances vary and
the solutions found within the context of the Debt Settlement Arrangement
and Personal Insolvency Arrangement processes will also vary. I must
continue to emphasise that the Bill makes it clear that those persons
experiencing difficulties in regard to debt should, primarily, engage with
their lenders so as to negotiate an appropriate settlement.
Lenders must engage properly with customers. Now that the architecture of
our new insolvency legislation is settled, I have made it clear that I
expect financial institutions to better engage with debtors. Financial
institutions, in most cases, I believe, have been reluctant to date to
engage in a definitive or realistic manner with borrowers who may be
overwhelmed by unsustainable debt and unable to discharge their monthly
outgoings. This realistic engagement will have to include, where
circumstances warrant, some debt forgiveness.
If our financial institutions refuse to engage, then we will in the future,
have to refine our approach to debt resolution. I realise that banks must
have regard to commercial considerations, but they must behave with greater
flexibility and insight and apply a broader range of common-sense options
based on financial reality.
The new Debt Settlement Arrangement and Personal Insolvency Arrangement
processes described in this Bill facilitate a voluntary deal between a
debtor and a specified majority of his or her creditors. A common-sense
rather than a coercive approach is taken, as expressed in the creditor
voting process provided for in the Bill. It is also an approach designed to
avoid, insofar as is possible within constitutional constraints, the
necessity for contentious court hearings and adjudications together with
the substantial delay and inevitable legal costs inherent in such process.
It is important to delimit expenditure incurred in legal costs that could
be better used in contributing to the discharge of monies due to creditors.
The approval process for the Debt Settlement Arrangement and Personal
Insolvency Arrangement is consistent with practices in comparable
jurisdictions. For example, under the individual voluntary arrangement
procedure in England, Wales and Northern Ireland, the approval of over 75%,
in value terms, of creditors voting at the creditors’ meeting is required.
Similarly, in Australia and Canada, there are debt settlement processes
that involve majority approval by creditors.
I have emphasised on more than one occasion that we should not forget that
there are many different types of creditors who may be potentially involved
in the new processes. Many persons or companies may be both debtors and
creditors. While I can understand the somewhat visceral feelings towards
financial institutions and their contribution to our current economic
difficulties, we must not lose sight of our objective, which is to
introduce reformed, workable and balanced insolvency legislation. Such
legislation is a required feature of any properly functioning economy. It
will assist not only debtors and financial institutions, but also corner
shops, tradespersons, local co-operatives, etc. All debtors and creditors
are concerned by this reform. For their sake and the sake of the wider
economy, all must be treated fairly. Many individuals are currently in
personal financial difficulty because of the failure of other individuals
to pay for work properly completed or goods or services supplied to them.
This approach, which seeks balance and fairness, has been criticised by
some commentators as suggesting that creditors, particularly mortgage
creditors, will exercise a veto. Such a contention is based on an incorrect
view of how normal commercial contractual issues may be resolved. Where one
borrows, one must repay where one can. If, for example, an individual
carries out electrical work at one’s home or retail outlet or does
essential plumbing repairs, that individual is entitled to be paid. If the
debtor is genuinely unable to pay, negotiation with creditors may resolve
the difficulty, and this Bill provides the new framework for sensible
negotiation.
The approach in the proposed Debt Settlement Arrangement and Personal
Insolvency Arrangement is that the insolvent debtor will, with the
assistance of a personal insolvency practitioner, put forward what the
debtor considers to be a realistic offer to his creditors, one that will
restore the debtor to solvency within a reasonable period while at the same
time giving creditors a better financial outcome than the alternatives of
debt enforcement or bankruptcy. The creditors will need to consider
carefully the debtor’s offer, conscious that if they refuse, the debtor has
another option - the standard debt discharge procedure available under the
reformed bankruptcy laws.
Bankruptcy may be considered the ultimate appeal mechanism of the debtor.
However, in that eventuality, which I still believe, is best avoided,
control is effectively lost by both sides. It would make sense for the
debtor and creditor - especially where there is only one main creditor - to
seek to conclude a bilateral agreement. The reform I am introducing will,
in addition to providing new legal remedies, provide a significant
incentive for financial institutions to develop and implement realistic
agreements to resolve debt issues with their customers.
The provisions in the Bill relating to a Debt Settlement Arrangement or a
Personal Insolvency Arrangement are specifically designed, as far as is
practicable, to facilitate a debtor’s continued ownership and occupation of
his or her principal private residence unless the debtor does not wish to
do so. The personal insolvency practitioner, in preparing a Personal
Insolvency Arrangement shall not, insofar as is practicable, include a
proposal that the debtor dispose of an interest in or cease to occupy their
principal private residence and is required to consider any appropriate
alternatives with regard to addressing an individuals level of
indebtedness. The Personal Insolvency Practitioner must have regard to a
variety of matters in this context including the likely costs to the debtor
of remaining in occupation of a principal private residence, whether such
costs would be disproportionately large and the overall background
financial circumstances. Consideration must also be given to the
"reasonable accommodation needs" of a debtor and his or her dependents and
to the cost of alternative accommodation. It may be appropriate in
particular circumstances having regard to the value of a family home that
it be sold and a proportion of the funds realised used to fully or partial
discharge debt
An application for a Debt Settlement Arrangement or Personal Insolvency
Arrangement must be made by a debtor through a personal insolvency
practitioner or PIP. The debtor is entitled to appoint a licensed PIP of
his or her choosing.
The development of an appropriate architecture for the regulation of
persons to act as PIPs in the Debt Settlement Arrangement and Personal
Insolvency Arrangement processes has been ongoing since publication of the
Bill. It has now been decided by Government that the Insolvency Service
will be the organisation to provide direct regulation of PIPs, with any
necessary technical assistance provided by the Central Bank. This approach
will provide a unified focus on the insolvency area. These provisions are
currently being drafted by Parliamentary Counsel and I hope to be in a
position to introduce the necessary amendments here at Committee Stage.
However, the Bill as it currently stands, in Part 5, essentially provides
for an enabling section in regard to the regulation of PIPs.
I expect that those persons who come forward to seek regulation as
insolvency practitioners will likely be drawn from the legal and
accountancy professions. However, applications will also be welcome from
other suitably qualified persons in the broad financial advisory who are
not members of those professions. Neither, my Department nor the proposed
Insolvency Service of Ireland will be involved in the recruiting of
practioners.
The Bill requires that the terms of the proposed arrangement make provision
for the fees and outlays of the PIP and specify the manner in which they
will be paid. Those terms are subject to the approval of both the debtor
and the requisite majority of creditors. Generally speaking, the costs of
personal insolvency practitioners involved in the management of any form of
insolvency are met by the product of that insolvency. There are no
provisions under the Bill for the State to pay the fees of personal
insolvency practitioners.
The Money Advice and Budgeting Service, (MABS), will continue its valuable
role of assisting and advising people with debt problems. In that regard,
MABS has agreed to operate as an approved intermediary in regard to
processing applications for Debt Relief Notices where it is likely to be
the primary such intermediary. Other organisations have also indicated an
interest in becoming involved in the processing of Debt Relief Notice
applications. These would most likely be non-profit organisations rather
than personal insolvency practitioners.
Determination of appropriate guidelines with regard to the reasonable
expenses that may be allowed to or negotiated by debtors in an insolvency
process will require further consideration. There are no such guidelines
readily available or agreed at this point. Different organisations, both
public and private, will have their own views and proposals in this regard.
This is an area of work with which MABS is particularly familiar in the
context of its current operations. The issue of reasonable living expenses
is of particular importance in the qualifying criteria for the Debt Relief
Notices.
The completion of the prescribed financial statement in the case of each
Debt Relief Notice, Debt Settlement Arrangement and Personal Insolvency
Arrangement will assess in detail the lifestyle expenditures of the debtor.
The approved intermediary or the personal insolvency practitioner, as the
case may be, will take account of the obvious basic necessities of living,
for example, food, heat and light, etc. However, he or she will question
the continuation by the debtor of certain other lifestyle expenditures.
Persons who are insolvent cannot realistically expect either creditors or
the taxpayer to fund a lifestyle that has been based on credit. This
approach is not intended to be ungenerous, but we must be realistic to
prevent possible misuse.
It is my hope the provisions contained in the Bill will act as a catalyst
for honest, open and constructive engagement between both unsecured and
secured creditors and those in genuine substantial financial difficulty.
The Bill provides concrete options for those genuinely unable to discharge
their financial obligations as opposed to those who can but will not do so.
Our shared objective must be to assist the greatest possible number of
borrowers who are experiencing genuine debt problems in particular with
mortgage arrears to be restored to sustainability. For this to occur, Irish
financial institutions will have to provide a larger and more imaginative
range of financial debt resolution options to address individual customers’
financial reality and deploy staff with the expertise to properly engage
with customers labouring under the weight of unsustainable debt. If the
financial institutions fail to do so, they will unnecessarily drive
indebted customers into bankruptcy to the detriment of the financial
institutions which may ultimately recover less of the debt owed than could
be recovered under a Personal Insolvency Arrangement.
While my focus today must be on outlining to the House the provisions
contained in the Bill, it is important to reiterate what is not in it. The
Bill does not provide for the automatic writing-off of debt, either secured
or unsecured, in the Debt Settlement Arrangement or Personal Insolvency
Arrangement processes. An agreement that is reasonable and workable for all
parties must be concluded on a case by case basis. Where a debtor is not
insolvent and can meet obligations to service his or her mortgage or other
debt obligations, he or she must continue to do so.
Neither does the Bill provide for any process, whereby negative equity can
be written-off for solvent debtors able to meet their repayment
obligations. Such a phenomenon is a reflection of the current market value
of the asset concerned. It does not exclusively relate to residential
property. It could affect all forms of property, for example, shares and
investments or art. Negative equity is not an issue of insolvency for the
purposes of the Bill. Of course, where an individual’s debts are
unsustainable, negative equity may form part of his or her overall
financial burden. It is important to emphasise the Bill does not relieve
solvent debtors of their responsibility to meet their contractual
obligations.
Cathaoirleach,
I now turn to the detail of the main provisions of the Bill.
Part 1, section 2, provides for a wide range of interpretations in regard
to the Bill.
Part 2, containing sections 7 to 22, inclusive, provides for a number of
standard provisions in the establishment of a new Insolvency Service of
Ireland to operate the new non-judicial debt resolution processes. It sets
out the functions and powers of the new service and its governance
arrangements. The Insolvency Service of Ireland will have the structures,
functions and powers consistent with an effective, independent body.
Section 23 restricts the provisions of the Freedom of Information Acts to
records relating to the general administration of the Insolvency Service,
thereby protecting the sensitive personal information held in relation to
the financial affairs of debtors.
The new Service will have a role in certifying applications for a Debt
Relief Notice or a Debt Settlement Arrangement and a Personal Insolvency
Arrangement and, thereafter, referring the relevant documentation to the
Circuit Court or the High Court in the context of arrangements relating to
assets which exceed a value of €2.5 million. The Insolvency Service of
Ireland has no role in the negotiation and agreement of the terms of either
a Debt Settlement Arrangement or a Personal Insolvency Arrangement.
Part 3 provides the central core of the Bill. It provides in its six
chapters for the three new non-judicial debt resolution processes, the
appointment of personal insolvency practitioners, offences and some
miscellaneous provisions.
Chapter 1 provides for the issue of a Debt Relief Notice. This will permit
the write-off of qualifying debts totalling not more than €20,000 for
persons with no income and no assets, who are insolvent and have no
realistic prospect of being able to pay their debts within the next three
years. The process is akin to bankruptcy in its broad approach, including a
three year supervision period, but provides for a low cost insolvency
option, having regard to the quantum of debt involved.
Section 24 provides that an application for a Debt Relief Notice will be
subject to certain eligibility criteria. The debtor must have qualifying
debts of €20,000 or less. Debts qualifying for inclusion in a Debt Relief
Notice are most likely to be unsecured debts such as credit card, personal
loans or catalogue payments. However, debts that do not qualify include for
a Debt Relief Notice include taxes, court fines, family maintenance
payments, etc A debtor will not be eligible to apply for a Debt Relief
Notice where 25% or more of the qualifying debts were incurred in the six
months preceding the application.
A debtor will only be eligible to apply for a Debt Relief Notice if he or
she:
- has a net monthly disposable income of €60 or less after making provision
for reasonable living expenses and payments in respect of excluded debts;
- holds assets, whether individually or jointly with another person, to a
value of be €400 or less, and
- one motor vehicle up to value of €1,200.
These provisions are similar to the Debt Relief Order process in operation
in England and Wales since 2009 and Northern Ireland since 2011. However,
the Bill goes further in that there are additional exemptions of €6,000 for
essential household appliances, tools or equipment required for the
employment or business of the debtor or materials necessary for the
education of the debtor’s children at primary and secondary level. These
latter provisions are significant exemptions in regard to the qualifying
criteria.
I should emphasise that the qualifying criteria for a Debt Relief Notice
are exactly that, qualifying criteria for the process. These criteria not
of themselves guarantee a debt write-off for a debtor or protect them
outside of the process from enforcement action by creditors. This basic
fact has often been overlooked in the debate on this process.
Only one Debt Relief Notice per lifetime will be permitted. Also a DRN
cannot be applied for within five years of completion of a Debt Settlement
Arrangement or a Personal Insolvency Arrangement.
Section 25 sets out how the Debt Relief Notice process is initiated by the
debtor. An application for a Debt Relief Notice must be submitted on behalf
of the debtor by an approved intermediary.
The approved intermediary will advise the debtor on his or her options and
the qualifying requirements and will assist them in preparing the necessary
prescribed financial statement which must be verified by means of a
statutory declaration and any other required documentation. A debtor who
participates in the Debt Relief Notice process is at all times under an
obligation to act in good faith and co-operate fully in the process. If the
qualifying criteria for the Debt Relief Notice are met, the authorised
intermediary will transmit the debtor’s application, under section 26, to
the Insolvency Service of Ireland.
Section 27 provides that on receipt of a completed application for a Debt
Relief Notice, the Insolvency Service of Ireland must consider it and make
such enquiries as it considers appropriate to verify the information,
including enquiries with the Department of Social Protection, the Revenue
Commissioners and local authorities. The service will be entitled to
presume that the eligibility criteria for the Debt Relief Notice have been
met if it has no reason to believe the information is incomplete or
inaccurate.
Section 28 provides that if the Insolvency Service of Ireland is satisfied
that the application is in order, it shall issue a certificate to that
effect and furnish the certificate and supporting documentation to the
appropriate court. The court will consider the application and, if
satisfied, issue the Debt Relief Notice and notify the Service.
Section 30 requires the Insolvency Service of Ireland to notify the
approved intermediary and the creditors of the issue of the Debt Relief
Notice and register it in the Register of Debt Relief Notices. Under
section 31, with the issue of a Debt Relief Notice the debtor is subject to
a supervision period of three years from the date of issue, unless the
court has ordered it to be terminated before then. During that period,
section 32 provides that creditors may not initiate or prosecute legal
proceedings or seek to recover payment for a debt or recover goods or
contact the debtor.
Section 33 requires the debtor to inform the approved intermediary and the
Insolvency Service of any material change in financial circumstances. So as
not to reduce the incentive to seek and obtain employment following
approval of a Debt Relief Notice, there is provision for debtors to repay a
portion of the debts in circumstances where their financial position
improves. These circumstances include receipt of gifts or windfalls of more
than €500 or where the debtor’s net income has increased by more than €400
per month. There is a restriction on the debtor applying for credit of more
than €650 during the Debt Relief Notice supervision period without
informing the person of his or her status.
Section 34 provides that should a debtor make repayments totalling 50% of
the original debt, the debtor will be deemed to have satisfied the debts in
full. In such a case, the Debt Relief Notice will cease to have effect, the
debtor will be removed from the Register and all of the debts concerned
will be discharged.
Under section 35, any funds transmitted by the debtor to the Insolvency
Service are to be paid on a pari passu or proportionate basis to the
specified. After the three year supervision period has come to an end,
section 43 provides that the qualifying debts will be discharged and the
debtor will be removed from the register of Debt Relief Notices.
Chapter 2 of Part 3 makes provision for the appointment of personal
insolvency practitioners for the purposes of applying for a Debt Settlement
Arrangement or Personal Insolvency Arrangement. Sections 45 to 50,
inclusive, provide for a range of practical matters in regard to the
appointment of a personal insolvency practitioner, the duties and
obligations on such a practitioner and the documents to be prepared for an
application for a Debt Settlement Arrangement or Personal Insolvency
Arrangement.
A key requirement, provided for in section 47, is the completion of the
prescribed financial statement by the debtor with the assistance of the
personal insolvency practitioner. The prescribed financial statement, which
must be verified by means of a statutory declaration, is the critical
element in an application for a debt resolution process. The details
required to be included in the prescribed financial statement may be
prescribed by ministerial regulation under section 131.
Chapter 3 of Part 3 provides for a system of Debt Settlement Arrangements
between a debtor and one or more creditors to repay an amount of unsecured
debt over a period of up to five years, with a possible agreed extension to
six years. The Debt Settlement Arrangement would assist persons who have
such income and assets and debts that they would fall outside the
eligibility criteria for a Debt Relief Notice. Sections 51 to 84.