Irish Personal Insolvency Reform

This material was first published by Insolvency Intelligence Limited, Issue 2 and has been reproduced by agreement with the publishers.

The desire to stem the tide of heavily indebted Irish citizens petitioning for their own bankruptcy in English and Northern Irish Courts has been a thread running through both Ireland's recent reform of its personal insolvency legislation and its involvement in the proposals to reform the EU Insolvency Regulation.

Under the EU Insolvency Regulation, a debtor should be made bankrupt in the jurisdiction in which he has his centre of main interests (COMI); namely, where he conducts the administration of his interests on a regular basis. Under the broad provisions for freedom of movement within the EU, a person is free to move heir COMI at any time and might do so for reasons unrelated to bankruptcy. Changing COMI to take advantage of a particular Member State's insolvency regime is also permitted but the debtor must meet the threshold requirements to establish COMI there. Creditors' recovery of debts is not necessarily prejudiced if a debtor were made bankrupt in England, say, rather than Ireland; an English trustee in bankruptcy may still distribute, following realisation of assets, to an Irish creditor. It is, though, likely to be more costly to administer a bankruptcy estate across national borders and an Irish creditor would have advantages of ease and understanding were it administered in their own jurisdiction.

Headlines in recent years have been drawn by well-known Irish developers and property developers with debts of hundreds of millions of Euros owed to Irish banks petitioning for their own bankruptcy in England or Northern Ireland. Practitioners also report a steady stream of petitions in the UK by other Irish nationals with lower—though still significant—levels of personal debt. It is estimated that between 10 and 25 Irish nationals were declaring bankruptcy each week in England. The reason? Debtors made bankrupt in the UK can be discharged from their debts after a year rather than the 12 years they may have faced in Ireland.

In reality, debtors were almost never made bankrupt in Ireland. Bankruptcy was previously a rarely used process in Ireland (reportedly, just 33 bankruptcy adjudications in 2011 and 35 in 2012). So it shocked and rankled many when, in the midst of Ireland's financial crisis, reports emerged of the country's largest personal debtors declaring bankruptcy in England to have their enormous debts to the now nationalised banks and NAMA wiped out, leaving them free to start afresh a year later. Meanwhile "less affluent" debtors who could not afford to move had to soldier on under their debts, subject to Ireland's more onerous insolvency regime. Consequently, there has been political will in Ireland to find a way to keep Irish debtors subject to Irish insolvency regime.

The Court in England and Wales and in Northern Ireland now examines debtors' petitions of these types with more rigour than was formerly the case. Although affecting only a small proportion of bankruptcies in England and Wales, bankruptcy tourism has become a prominent issue and the Court is concerned to ensure it has jurisdiction to make bankruptcy orders. Whereas petitions presented unchallenged in the early years of the debt crisis may have been accepted as presented, the Court now positively asks whether there is substance or illusion to a petitioning debtor'sclaim that their COMI has shifted to, say, London. Typically, where the petitioning debtor is a foreign nationalwith debts largely incurred in another jurisdiction to foreign creditors, the High Court in England will adjourn the first hearing as a matter of course, and direct the debtor to provide evidence as to their COMI and to serve their petition on their creditors so as to allow the creditors' submissions too.

A long list of practical factors indicative of a true change of COMI has accrued through recent cases. A well-advised debtor who attempts to join the dots to establish COMI may or may not succeed, the Court judging each petition on its own facts, considering the substance and permanence of the debtor's claimed COMI.

In contrast to Ireland, the English personal insolvency system has been heavily tested: c.41,250 bankruptcies in England and Wales in 2011 and c.31,750 in 2012 makes for stark comparison with the Irish figures, notwithstanding the difference in total populations.

Irish Reform

Ireland's Personal Insolvency Act became law at the end of 2012 and became operational in 2013. Ministerial orders were made in March 2013 putting the infrastructure in place: a national insolvency service formed and specialist judges appointed. The substantive changes came into force later in the year: reformed bankruptcy provisions and the introduction of three new voluntary arrangements between debtors and their creditors to encourage settlement of debts without recourse to bankruptcy proceedings: Debt Relief Notices (DRNs), Debt Settlement Agreements (DSAs) and Personal Insolvency Arrangements (PIAs). DRNs are applicable to debtors with unsecured debts of up to €20,000. DSAs apply to unsecured debt of any value over €20,000. PIAs, uniquely, tie in secured and unsecured debt (nominally the secured debt only up to a limit of €3m, but the limit can be lifted with creditor agreement).

A debtor's application for a DSA or PIA is subject initially to Insolvency Service approval and then Court approval. If the Court is satisfied that the requirements have been met, a 70 day moratorium on enforcement of the relevant debts will be granted while the proposal is put to creditors. It needs to be approved by 65 per cent of creditors by value to take force and then lasts for up to 5 or 6 years respectively, during which time debtors will receive protection from legal proceedings brought by creditors signed up to the Arrangement. At the end of the period of the arrangement, if the debtor has met the terms, the debts covered by the arrangement are discharged.

If a debtor falls outside the caps above (as many will) the only remaining option in Ireland is bankruptcy. This is where there is the biggest reform by the reduction to the automatic discharge period to 3 years (in normal circumstances), falling in line with provisions in much of Europe. Bankruptcy appears to be seen, though, as the option of last resort, with the Government keen that debtors make use of the voluntary arrangements where possible. A debtor can petition for bankruptcy in Ireland only after making "reasonable efforts" to come to arrangement with their creditors, and then only if their liabilities outstrip their assets by more than €20,000. The threshold debt for a creditor's bankruptcy petition is also €20,000.

Will the reform stem the tide?

Bankruptcy is easier to come by in the UK: there is no such obligation for a debtor to attempt to come to agreement with creditors before petitioning for their bankruptcy, nor such a threshold as in Ireland. The threshold debt for a creditor's petition merely £750.

Thus Irish debtors are presented with a carrot in the form of the new personal insolvency provisions in Ireland, and a stick in the form of the English Court's more exacting requirements for foreign nationals to demonstrate COMI. Those developments seem likely to be insufficient to discourage significant numbers of potential Irish "bankruptcy tourists" from coming to the UK.

Despite the reforms, the UK's headline attraction for Irish debtors remains "time". The automatic discharge period in the UK is just a third of that under the new regime in Ireland, nor is there any requirement to delay matters further by negotiating with creditors before petitioning for bankruptcy. Further, there is a much greater sense of certainty in petitioning in the UK; certainty of result and of the actions required to be taken. Before a Committee of the Oireachtas (the Irish Parliament) in March 2013, Alan Shatter, the Government minister who introduced the new Personal Insolvency Act last year, admitted that:

"despite our reform, we may continue to see a number ofIrish people establishing a COMI in the UK, with the ultimateintention of taking advantage of the lower discharge periodfor bankruptcy there".

Reasonable domestic needs

Unusually, guidelines setting out a reasonable standard of living, and quantifying the reasonable living expenses required to meet that standard, have been produced by the Irish Government's Insolvency Service. The guidelines are to be used by creditors and debtors in negotiating the new arrangements and by the Court in determining bankruptcy income payment orders. The guidelines detail maximum amounts to be spent on various heads of expenditure and a matrix to calculate the total allowed for particular sets of circumstances: household composition, the need for a car, variable costs such as childcare and rent or mortgage and special circumstances such as medical costs.

While the concept of reasonable living expenses exists in the UK in respect of income payments orders, it is not as proscriptive as the Irish system and nor are the parameters set by a public body. Instead, the English Court determines reasonable domestic need, as required, according to the circumstances of each case (for instance, private school fees may constitute reasonable domestic need).

Although the Irish Insolvency Service states that they will allow flexibility within the overall financial allowance and that the guidelines are a starting point for negotiations between debtors and creditors, they also want an objective view to be taken of reasonable living expenses and it is difficult to see creditors often agreeing to allow debtors expenditure outside the limits now they have been Government-sanctioned.

How will the future play out?

Despite the Irish Government's strong-arming of the banks to play nicely with its debtors, threatening them with greater write-offs if the new arrangements fail and a deluge of bankruptcies ensue, there is no certainty about how the banks will approach these negotiations. There is no guarantee of consistency even between a single bank's treatment of its different debtors, let alone amongst different banks, nor as time passes and the banks' priorities and strategies change.

Indeed, there is no certainty at all about how a new system with newly appointed officers will cope with thousands of applications in the first few months. Even leaving aside the attractions of the shorter automatic discharge period in the UK, the benefits of utilising a well-established regime with certainty of outcome compare favourably to the prospect of grappling with the uncertainties of the new Irish regime in its settling down period.

The English Court's recent decisions have generally required petitioning debtors to have made their home in England for a period prior to presenting their petition; at least six months is practitioners' current advice to Irish nationals considering bankruptcy in England. It is likely that there will be many debtors already undertaking the steps necessary to establish that their COMI is in England, regardless of the reforms introduced in Ireland.

The Irish Government has predicted a surge of applications to take advantage of the new personal insolvency provisions introduced in Ireland this year; 15,000 applications for DSAs and PIAs and 3,000 bankruptcy applications are expected. A significant proportion of Irish debtors can be expected to prefer the UK's bankruptcy regime still. If the English and Northern Irish Court's COMI thresholds can be met, then for those that can manage and afford the upheaval of a move away from home, England appears to still be a more advantageous jurisdiction for Irish bankrupts.

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