DSA Formulation
Cases
Bank of Ireland -v- Smyth
[2017] IEHC 5
THE HIGH COURT
BANKRUPTCY
[No. 1920P]
IN THE MATTER OF A PETITION FOR ADJUDICATION OF BANKRUPTCY BY THE GOVERNOR AND COMPANY OF THE BANK OF IRELAND AGAINST ALISON SMYTH (OTHERWISE ALISON LAYDIER)
JUDGMENT of Ms. Justice Costello delivered on the 16th day of January, 2017
1. In this case the court is asked to consider whether or not it should exercise its discretion to adjourn, stay or dismiss the petition for the adjudication of the debtor as a bankrupt pursuant to the provisions of the s. 14 (2) of the Bankruptcy Act, 1988, as amended, and/or the inherent jurisdiction of the court.
The facts
2. The facts of this case are largely undisputed. The petitioner obtained a judgement against the debtor on 13th November, 2014 in the sum of €2,797,754.52. On the 3rd July, 2015 the petitioner demanded payment of the sum then due and owing pursuant to the judgment. On 12th October, 2015 a bankruptcy summons was issued in favour of the petitioner and, as the petitioner did not discharge the sum claimed, she committed an act of bankruptcy. Within three months of the act of bankruptcy the petitioner presented a petition for the adjudication of the debtor as a bankrupt on 26th January, 2016 returnable for 7th March, 2016. It is accepted that the debtor is domiciled within the State and thus that the requirements of s. 11 (1) of the Act of 1988 have been complied with.
3. The debtor engaged the services of a personal insolvency practitioner to ascertain whether her inability to pay her debts could be more appropriately dealt with by an alternative to bankruptcy, more particularly a debt settlement arrangement or a personal insolvency arrangement. She obtained a protective certificate pursuant to section 61 of the Personal Insolvency Act, 2012, as amended. The debtor prepared a prescribed financial statement. Based upon the information provided by the debtor, the personal insolvency practitioner prepared a debt settlement arrangement (DSA). The proposal showed that the debtor was married with four dependant children. She is a full-time parent and is not employed and is living as a caretaker in her current residence. She has no assets and no secured debts. As of the date of the preparation of the DSA the sum due to the petitioner had risen to €3,143,603. There were also monies due to KBC Bank (Ireland) plc, Promontoria ( the purchaser of a debt formerly due to Ulster Bank (Ireland) plc) and Ulster Bank (Ireland) plc, giving a total of €8,355,658. Her sole monthly income is €560 from the Department of Social Protection but this exceeds her monthly expenditure by €116.08.
4. It is thus clear from the prescribed financial statement and the proposed DSA that the debtor has no assets to be realised and she has no surplus income available or the prospect of any such surplus income available from which to make income payments in respect of the debts due to her creditors.
5. The proposed DSA was based upon an offer by her grandmother to pay €150,000 towards a resolution of her debts. It was proposed that a lump sum be paid within two months of the court approval of the DSA and that the creditors would be in receipt of the monies payable within three months of the approval of the DSA. Under the proposal KBC Bank plc would receive 7.35% plus 0.83% (in respect of two separate debts) of the settlement monies being €10,679.43 plus €1,209.89; the petitioner would receive 37.62% being €54,659.66, Promontaria would receive 54.11% being €78,619.57 and Ulster Bank would receive 0.08% being €118.95. This makes a total repayment to unsecured creditors net of the Personal Insolvency Practitioner’s fees of €145,287.50.
6. The DSA included a comparison with the expected outcome in the event of a bankruptcy. If the DSA were approved then the sum of €145,288 was available for unsecured creditors, which amounted to recovery of 1.74% of the total debt. The recovery in the event of the bankruptcy of the debtor was nil.
7. 65% of the votes were required to accept the proposed DSA. The petitioner held 37.62% of the voting rights and it voted against the proposal. Thus the DSA was rejected, as the petitioner holds a blocking percentage of the votes of the creditors.
8. The petition was adjourned from time to time while the debtor obtained a protective certificate pursuant to s. 57 of the Personal Solvency Act, 2012 and her personal insolvency practitioner prepared the DSA as I have outlined above. The DSA was rejected on 12th September, 2016. When the petition was next in the bankruptcy list, the petitioner sought to proceed with the petition. The debtor argued that the court had power under the Personal Insolvency Act, 2012 and s. 14 (2) of the Bankruptcy Act, 1988 to direct that a defeated proposal for a DSA be resubmitted in either its existing or in an improved form and she sought a hearing on this issue. The matter was heard by me on 13th December, 2016.
The submissions of the debtor
9. It was not contested that the debtor has no assets to be realised and had no income from which any bankruptcy payment orders could be made. Bankruptcy of the debtor could not result in the realisation of any monies for the benefit of creditors. In McGinn v. Beagan [1962] I.R. 364 Budd J. stated that:—
“The proper purpose of bankruptcy proceedings is to make assets available to creditors. The debtor in this case has very big debts, and I am quite satisfied that he has no assets to meet them. Judgments remain unsatisfied and creditors have failed to obtain instalment orders.”
9. The decision in McGinn was followed by Baker J. in ACC Loan Management Ltd v. P. [2016] IEHC 117. At para. 7 of the judgment she stated:—
“I consider that there is an inherent jurisdiction to stay proceedings including bankruptcy proceedings that are, or have become, oppressive or an abuse of process, and that in the case of a petition for adjudication in bankruptcy, the principles identified in McGinn v. Beagan, are engaged, and the court may inquire whether the petition was presented, and is genuinely being prosecuted for the purposes of recovering the debt.”
10. Baker J. also quoted from the judgment of Dunne J. in D. v. D. [2008] IEHC 435 where Dunne J. found that the petition was not being pursued for an ulterior or improper motive but that the petitioner in that case had been “driven to take these steps in order to secure the payments of the money provided for in the order of the court”
11. The debtor accepts that the petition had not been brought for an improper purpose. Her issue is with the continuance of the petition proceedings. She says that a bankruptcy petition must be for the purpose of realising assets or recovering debts on the basis of the authorities in McGinn, ACC Loan Management and D. v. D. Once the debtor presented her DSA it then became apparent to the petitioner that there were no assets to be realised and there was no prospect of recovering any payment of the debt due by the debtor to the petitioner. Thus she submits that the maintenance of the proceedings is for an improper purpose and on that basis the petition should be stayed or dismissed as an abuse of process.
2. The second submission is based upon the provisions of s.14 as amended by the Act of 1988. This provides:—
“14. (1) Subject to subsection (2), where the petition is presented by a creditor, the Court shall, if satisfied that the requirements of section 11 (1) have been complied with, by order adjudicate the debtor bankrupt.
(2) Before making an order under subsection (1), the Court shall consider the nature and value of the assets available to the debtor, the extent of his liabilities, and whether the debtor’s inability to meet his engagements could, having regard to those matters and the contents of any statement of affairs of the debtor filed with the Court, be more appropriately dealt with by means of- (a) a Debt Settlement Arrangement, or
(b) a Personal Insolvency Arrangement, and where the Court forms such an opinion the Court may adjourn the hearing of the petition to allow the debtor an opportunity to enter into such of those arrangements as is specified by the Court in adjourning the hearing.”
13. Counsel for the debtor submits that the proposed DSA showed that there could be recovery for unsecured creditors, including the petitioner, if the DSA was approved but that there would be no recovery for the creditors if the debtor was adjudicated bankrupt. The Court could assess the nature and value of the assets to the debtor and the extent of her liabilities. He submits that the Court could, in the circumstances, conclude that the debtor’s inability to meet her engagements could be more appropriately dealt with by means of a DSA. He makes this submission while acknowledging that the debtor already had obtained a protective certificate and that her proposed DSA had been rejected. He submits that it is open to the debtor to make a second application to the High Court pursuant to s. 57 (2) of the Insolvency Act, 2012 notwithstanding the fact that she had been the subject of a protective certificate issued pursuant to s. 61 of the Act of 2012 less than 12 months prior to the date of a proposed second application for a protective certificate. He so argues on the grounds that the prohibition on applying for a second protective certificate does not apply:—
“Where the debtor has, on notice to the Insolvency Service, made an application to the appropriate court and the court has made an order stating that it is satisfied that the current insolvency of the debtor arises by reason of exceptional circumstances or other factors which are substantially outside the control of the debtor and that it would be just to permit the debtor to make a proposal for a Debt Settlement Arrangement.” (S. 57(2) of the Act of 2012)
He says it would be open to a court to conclude that the debtor could apply for a second protective certificate pursuant to s.57(2) of the Act of 2012, as amended.
14. Counsel submits that s. 14(2) confers upon the Court the discretion to assess inter alia whether the debtor’s inability to meet his engagements could be more appropriately dealt with by means of a debt settlement arrangement. If the Court forms such an opinion then the Court is given discretion to adjourn the hearing of the petition to allow the debtor an opportunity to enter into a debt settlement arrangement (the relevant alternative to bankruptcy in this case). He emphasises the fact that the rejection of the DSA has prejudiced the other creditors of the debtor. It is not disputed that they will receive nothing in a bankruptcy and this was a matter to which the Court should have regard in construing s. 14(2) and in the exercise of its discretion pursuant to the subsection.
15. Counsel submits that the continuance of the bankruptcy proceedings is not for the purpose of making assets available to creditors or for recovering payment for creditors in the circumstances of this case. He therefore submits that a DSA must be more appropriate if the purpose of bankruptcy is to realise assets and to secure payment to creditors. He refers to the full title of the Personal Insolvency Act, 2012 which outlined the following objectives:—
“The need to ameliorate the difficulties experienced by debtors in discharging their indebtedness due to insolvency and thereby lessen the adverse consequences for economic activity in the State, the need to enable creditors to recover debts due to them by insolvent debtors to the extent that the means of those debtors reasonably permits, in an orderly and rational manner, and the need to enable insolvent debtors to resolve their indebtedness (including by determining that debts stand discharged in certain circumstances) in an orderly and rational manner without recourse to bankruptcy, and to thereby facilitate the active participation of such persons in economic activity in the state.”
16. Counsel emphasises that it is the clear intent of the Act of 2012 that personal indebtedness be resolved where possible without recourse to bankruptcy.
17. Counsel referred to the decision I gave in the case of Eric O’Callaghan, a petitioning debtor [2015] IEHC 185 when I construed the provisions of s. 15(2) of the Bankruptcy Act, 1988 (as amended). In that case a proposed personal insolvency arrangement was rejected by the debtor’s principal creditor. Under the proposal the creditor would have recovered a small portion of the sum due but in bankruptcy it would recover far less. He presented a petition for his own bankruptcy and invited the court to conclude that his liabilities could more appropriately be dealt with by the proposed PIA rather than bankruptcy, given the difference between the returns for creditors between the proposed PIA and bankruptcy. He argued that he therefore should not be adjudicated a bankrupt pursuant to his own petition by reason of the provisions of s.15 (2) of the Act of 1988, as amended. I rejected the argument and he was adjudicated a bankrupt on his own petition.
18. Section 15 of the Act of 1988 applies where debtors present their own petitions in bankruptcy and s. 14 applies where creditors present petitions for the adjudication of debtors as bankrupt. The provisions of s.15(2) are identical to those of s. 14(2). Counsel distinguish between the two subsections on the grounds that where a debtor presents a petition for his own adjudication, he must include a sworn statement of affairs which sets out all of his assets and liabilities. Furthermore, a debtor may not present a petition for adjudication unless the petition is accompanied by an affidavit sworn by the debtor stating that he has, prior to presenting the petition, made reasonable efforts to reach an appropriate arrangement with his creditors relating to his debts by making either a proposal for a debt settlement arrangement or a personal arrangement to the extent that his circumstances would permit him to enter into such an arrangement (s. 11(4) of the Act of 1988). The debtor is required to meet a personal insolvency practitioner and to exhibit a letter from the personal insolvency practitioner confirming either that the debtor is not in a position to make a proposal for a debt settlement arrangement or a personal insolvency arrangement or that there is no alternative other than bankruptcy open to him. He also distinguishes the O’Callaghan case from this case on the basis that Mr.O’Callaghan’s first priority was to return to solvency rather than to remain in his house and that he wished to be adjudicated a bankrupt pursuant to his petition if the Court was satisfied that it was otherwise appropriate to adjudicate him bankrupt
19. Counsel pointed out that following the decision in the O’Callaghan case, the Personal Insolvency Act, 2012 was amended by the Personal Insolvency (Amendment) Act, 2015 by the insertion of s. 115A. This permits the Court to review personal insolvency arrangements which have been rejected by creditors in certain circumstances. The Court is empowered to make an order confirming the coming into effect of the proposed personal insolvency arrangement notwithstanding the fact that it was not accepted by the creditors in accordance with the provisions of Chapter IV of the Act of 2012. He noted that the amendment did not apply to debt settlement arrangements and that it was therefore not open to the debtor in this case.
20. For these reasons the petition should be either stayed, adjourned or dismissed pursuant to the provisions of s.14(2) or the inherent jurisdiction of the court.
Petitioner’s submissions
21. The petitioner observes that the petition had been adjourned with the consent of the petitioner to allow the debtor to explore the insolvency process. Ultimately her DSA had been rejected by the Bank. Counsel submits that the petitioner was entitled to reject the DSA. She contrasts the position of a DSA with that of a PIA. The Oireachtas saw fit to enact s. 115A of the Personal Insolvency Act, 2012 which permits the Court to review certain PIAs. It made no such amendment in respect of DSAs. She urges the Court to conclude that the Oireachtas did not intend to confer upon the Court an independent right of review in respect of a DSA.
22. She submits that the reasoning adopted in the O’Callaghan case in respect of s. 15(2) applies equally to s. 14(2). In this case she submits that a creditor cannot be obliged to agree to write down a debt.
23. She contrasts the provisions of s. 14(1) with the provisions of (2). She says that the courts have found that the provisions of s. 14(1) are mandatory and that a petitioner who has satisfied the requirements of s. 11(1) is entitled to the adjudication subject only to the requirements of s. 14(2). It is clear that subs. (2) is an exception to the entitlement. She relies upon the decision of Baker J. in ACC Loan Management Limited v. P. where, at para. 47 Baker J. stated that s. 14(1) “creates, in my view, a prima facie entitlement on the part of a petitioning creditor that the adjudication order be made, and s. 14(2) must be seen as an exception.”
24. Counsel submits that the purpose of subs. (2) is to facilitate the debtor in exploring whether or not he can avail of either a debt settlement arrangement or a personal insolvency arrangement. In ACC Loan Management Limited Baker J. discussed the provisions of s. 14(2) and at para. 39 she held:—
“Thus the Oireachtas requires the court to consider whether the personal insolvency route would offer a more beneficial solution in the light of the desire that the debtor be permitted to continue to participate in economic activity. If the personal insolvency solution is reasonably available to a debtor he should be given time to explore that option.”
25. At para. 45 of her judgment she went on to state:—
“[B]ut I cannot see that my discretion ought to be exercised in favour of the debtor under s. 14(2) when I am not satisfied that the circumstances point to any reasonable or practical reality in a PIA being available to Mr. P., having regard to the attitude of the Bank which is a secured creditor, and having regard to the amount of his debts and the monetary limit on the availability of the personal insolvency route when the secured debts exceed €3 million.(emphasis added)
26. The debtor is not obliged to take up this opportunity. It FCR Media (formerly Truvo Ireland Limited) v. Angela Farrell [2014] IEHC 252, the debtor chose not to present any information to the Court regarding the nature and value of her assets or the extent of her liabilities or any information to indicate that her inability to meet her engagements could be more appropriately dealt with by means of either a debt settlement arrangement or a personal insolvency agreement. In the circumstances the Court concluded that it could not form the view that her inability to meet her liabilities could be more appropriately dealt with under either of those arrangements and concluded that the petitioner in that case was entitled to an order of adjudication of bankruptcy against the debtor. Counsel for the petitioner submitted that this was illustrative of the fact that s. 14(2) affords the debtor an opportunity, if appropriate, firstly, to explore and secondly, to enter into either a debt settlement arrangement or a personal insolvency arrangement and no more.
27. She submits that in this instance the process ran its course. The debtor engaged a PIP who prepared a DSA and the DSA was rejected.
28. Counsel for the petitioner accepts that the court had an inherent jurisdiction to stay or dismiss proceedings as was held in McGinn v. Beagan. She submits that the petition had been properly brought. In considering the inherent jurisdiction of the Court, the Court should have regard to the provisions of s.14 (2). She asks, rhetorically, what would be the purpose in staying the proceedings? There has been no indication that the debtor will present a new proposal and specifically there is no suggestion that more money will be forthcoming. She relies upon the fact that the Court cannot compel the petitioner to accept a DSA. Thus, in effect, the debtor’s application must be to dismiss the petition on the grounds that no assets of the debtor can be realised and no monies recovered for creditors. It cannot be for the purpose of compelling the petitioner to accept the DSA which it has already in its discretion rejected. That being so, the application should be refused.
Discussion.
29. The first matter for consideration is whether the continuance of the petition proceedings is for an improper purpose in circumstances where the debtor says that she has no assets and that there will be no recovery for creditors in the event that she is adjudicated a bankrupt, matters which are not disputed by the petitioner.
30. In McGinn v. Beagan Budd J. accepted that there was an inherent jurisdiction to stay oppressive proceedings or proceedings which are an abuse of the processes of the Court. He stated that the proper purpose of bankruptcy proceedings is to make assets available to creditors. However, the basis for his decision is to be found in the final sentence of the judgment as follows:-
“It seems to me that I should not allow the Court’s processes to be used for an ulterior and collateral purpose, and I will therefore stay all further proceedings on the debtor’s summons.”
In other words he took the view that the proceedings amounted to an abuse of the processes of the Court. The case is not authority for the proposition that if bankruptcy proceedings are not for the purpose of making assets available to creditors they amount to an abuse of process and therefore the proceedings should be stayed.
31. In ACC Loan Management Ltd v. P. Baker J. made it clear that the inherent jurisdiction to stay proceedings, including bankruptcy proceedings, is on the basis that they are or have become an abuse of process. She held that a Court may enquire whether a petition was presented and is genuinely being prosecuted for the purposes of recovering the debt. It is not disputed that the petition in this case was presented for the purposes of recovering the debt due by the debtor to the petitioner. The issue is whether it is genuinely being prosecuted for those purposes in light of the information set out in the proposed DSA. The Court is asked to infer that this is not the case on the basis that there are no assets to be recovered and the debtor has no income from which to repay her debts. The Court is further asked to infer that the petition is not being pursued in good faith because the petitioner would have made a limited recovery under the proposed DSA which it rejected but it will recover nothing in a bankruptcy.
32. In order to assess these issues it is necessary to consider the provisions of the Personal Insolvency Act, 2012 relating to debt settlement arrangements. The provisions dealing with debt settlement arrangements are set out in Chapter III of the Act. Section 73, as amended, provides that the voting rights exercisable by a creditor at a creditors’ meeting shall be proportionate to the amount of the debt due by the debtor to the creditor on the day the protective certificate issued. Subsection 6, as amended by the Act of 2015, provides:—
“(6) A proposal for a Debt Settlement Arrangement shall be considered as having been approved by a creditors’ meeting held under this Chapter where a majority of creditors representing not less than 65 per cent in value of the total amount of the debtor’s debts due to the creditors participating in the meeting and voting have voted in favour of the proposal.”
33. Section 72(7) provides that if the proposal is not approved or deemed to have been approved in accordance with s. 73, then the debt settlement arrangement procedure shall be deemed to have come to an end and the protective certificate issued under s. 61 shall cease to have effect.
34. The scheme of the Act entitles creditors to vote for or against a proposed DSA as they see fit. A scheme will only be approved or deemed to have been approved “where a majority of creditors representing not less than 65 per cent in value of the total amount of the debtor’s debts due to the creditors participating in the meeting and voting have voted in favour of the proposal.” In other words a proposal may be voted down if a creditor or creditors participating at the meeting and voting hold more than 35% of the value of the debt and vote against the proposal. The proposal must include a comparison between the outcome on the proposed DSA and the outcome in bankruptcy. In these circumstances the Oireachtas has recognised the right of creditors to reject a proposed DSA even where the creditor(s) are aware that the outcome in bankruptcy will be less favourable than in the proposed DSA. It has not conferred a power on the Court to confirm the coming into effect of a DSA which has not been accepted by the required majority of the debtor’s creditors.
35. In those circumstances, is it then open to the Court to infer that the continuance of bankruptcy proceedings after the rejection of a DSA amounts to an abuse of process? In my opinion, put in those terms, without more, it is not. If I were to hold otherwise, it would amount to an indirect compulsion on a petitioning creditor to agree to a DSA. Indeed, it could leave a petitioning creditor in a worse off situation. The DSA may have been rejected and yet the petitioning creditor would not be permitted to continue with the bankruptcy petition. In fairness to the debtor in these proceedings, this is not her intention and she is prepared to represent the DSA for the acceptance of the petitioner.
36. When it enacted the Act of 2012, the Oireachtas struck a balance between creditors and debtors in relation to debt settlement arrangement and personal insolvency arrangements. That balance left the creditors free to accept or reject proposed DSAs or PIAs. Three years later, in 2015, the Oireachtas chose to amend the legislation by providing for Court review of proposed personal insolvency arrangements in certain circumstances as set out in s. 115A of the Act. This is relevant to the considerations of the Court under either ss. 14(2) or 15(2) where the proposed alternative to bankruptcy is a PIA. The Oireachtas elected not to make equivalent amendments in the case of DSAs. Thus, in my opinion, it remains the case that creditors are free to reject a DSA and the Court has no role in reviewing or ultimately compelling creditors to accept a DSA which they have rejected at a creditors’ meeting.
37. It was accepted by Baker J. in ACC Loan Management Ltd. v. P. that in considering the inherent jurisdiction of the Court to stay bankruptcy proceedings, the Court should have regard to the provisions of s. 14(1) of the Act of 1988. Baker J. was of the opinion that:—
“This creates, in my view, a prima facie entitlement on the part of a petitioning creditor that the adjudication order be made, and s. 14(2) must be seen as an exception.”
Section 14(1) requires simply that the requirements of s. 11(1) of the Act of 1988 have been complied with. There is no requirement that it be shown that there are assets available to be recovered or that the debtor is possessed of moneys from which creditors may be repaid. And it is clear why this is so; creditors usually will not be fully informed of the extent of the debtor’s assets and liabilities. There is also the possibility that assets may be concealed or transferred to third parties, though, I should emphasise, there is no such suggestion in this case. Given the mandatory nature of s. 14(1), this militates against the inference which the debtor invites the Court to draw in the circumstances. It is a powerful argument against the Court granting the relief sought unless it can be shown that the proceedings otherwise amount to an abuse of the process of the Court. No other grounds have been advanced to support the suggestion that the petition is being pursued for an improper purpose.
38. For these reasons, I am of the opinion that the continued maintenance of a petition to bankrupt a debtor by a creditor who has voted to reject a proposed DSA does not amount to an abuse of process, notwithstanding the fact that there may be no assets to be realised in the bankruptcy process nor moneys for the payment of debts of creditors.
39. The next matter to be considered is whether or not the debtor’s liabilities can be more appropriately dealt with by means of a debt settlement arrangement and if so whether the Court should exercise its discretion to adjourn the hearing of the petition to allow the debtor an opportunity to enter into a DSA.
40. The power of the Court to adjudicate a debtor bankrupt pursuant to s. 14(1) is subject to subsection 2. If the Court forms a certain opinion then subs. 2 authorises the Court to adjourn the hearing of the petition “to allow the debtor an opportunity to enter into” a DSA or PIA as the Court may specify. In other words, the Court’s power is to adjourn the hearing of the petition in order to afford the debtor an opportunity to enter into an arrangement. In this case the Court has already adjourned the petition over a number of months in order to allow the debtor an opportunity to enter into a DSA, albeit without the Court forming the opinion specified in subs. 2, as it was by consent of the parties. Thus the debtor has had the benefit of the operation of s. 14(2).
41. Once a debtor has been given that opportunity, as occurred here, then I can see no difference in principle between the situation under s. 14(2) and the situation under s. 15(2). Just as there were detailed provisions set out in Chapter IV of the Personal Insolvency Act, 2012 governing personal insolvency arrangements, there are also detailed provisions governing debt settlement arrangements set out in Chapter III of the Act. In each case the Oireachtas has given the right to creditors of a debtor to vote to either accept or to reject a proposed PIA or DSA. It therefore seems to me that the reasoning I applied in the O’Callaghan case to s. 15(2) applies equally to the construction of s. 14(2). The Court is not empowered to compel a creditor to vote to accept a DSA.
42. That being so, what would be the purpose in this case of adjourning the petition to allow the debtor to represent her DSA? There was no suggestion that she was going to present a different proposal or that there would be significantly more money on offer. The petitioner indicated that it would refuse the proposal if it were offered again. In ACC Loan Management Ltd. v. P. Baker J. formed the opinion that if a secured creditor owed more than €3 million indicated that it would not consent to the debts being dealt with by way of a PIA, then there was no likelihood of the liabilities of the debtor being dealt with under the insolvency regime. At para. 45 she stated:-
“ but I cannot see that my discretion ought to be exercised in favour of the debtor under s. 14(2) when I am not satisfied that the circumstances point to any reasonable or practical reality in a PIA being available to Mr. P., having regard to the attitude of the Bank which is a secured creditor, and having regard to the amount of his debts and the monetary limit on the availability of the personal insolvency route when the secured debts exceed €3 million.”
43. I accept the approach of Baker J. to the exercise of the Court’s discretion under s. 14(2). I am not satisfied in the circumstances of this case that there is any reasonable or practical reality, in the words of Baker J., in a DSA being available to the debtor having regard to the attitude of the petitioner in this case. Just as the bank in ACC Loan Management Ltd. effectively had a veto on any possible PIA by reason of the level of secured debt and its refusal to consent in writing to the limit having no application in that case, so also the petitioner in this case, having 37% of the voting rights, has the ability to veto any DSA which the debtor may present to her creditors.
44. I therefore have formed the opinion that the debtor’s inability to meet her engagements could not be more appropriately dealt with by means of a DSA and therefore it follows that I ought not to exercise my discretion to grant an adjournment or to stay the petition pursuant to s. 14(2). For the same reasons I will not dismiss the petition. It follows that the creditor is entitled to proceed with the petition. The requirements of s.11(1) of the Act have been satisfied. I adjudicate the debtor a bankrupt in accordance with s. 14 (1) of the Act.
Nugent Personal Insolvency (Costs)
[2016] IEHC 309 JUDGMENT of Ms. Justice Baker delivered on the 8th day of June, 2016.
1. On the 10th March, 2016, I delivered judgment in the substantive application of Danske Bank for an order setting aside an extension of a protective certificate granted ex parte to James Nugent, a debtor, on the 10th February, 2016. For the reasons set out in that judgment I made an order setting aside the extension of the protective certificate. See Nugent & Personal Insolvency Acts [2016] IEHC 127.
2. This judgment is given in the application by Danske Bank for an order that the costs of that application be borne by the personal insolvency practitioner, Tom Murray, who acted on behalf of the debtor for all purposes related to the personal insolvency application, and the application for the extension of the protective certificate.
3. An order for costs in respect of the application against the debtor, Mr. Nugent, was made by me without any real opposition from Mr. Nugent. Mr. Nugent was adjudicated bankrupt by order of Costello J. on the 4th April, 2016 in which she awarded costs against him in favour of Danske Bank, the petitioning creditor, and that order was not opposed.
4. Danske Bank argues that as the personal insolvency practitioner (“PIP”) is deemed for the purposes of the personal insolvency legislation to be the party making the application, and because of the central role that the PIP plays in the statutory process, that the PIP ought to bear responsibility for the costs incurred by Danske in the successful application to set aside the extension of the certificate. The Bank relies in particular on para. 31 of my judgment where I stated as follows:-
“31. A Personal Insolvency Practitioner is in a unique role, not equivalent to the role of an examiner or a liquidator appointed by the court under the Companies Acts, although some similarities can be noted. The PIP is required to be interposed between the Insolvency Service of Ireland and the debtor. A debtor may not engage with the process envisaged by the Act, whether to seek a personal insolvency arrangement, or a debt settlement arrangement without employing a PIP. The PIP takes a role between the administrative functions of the Insolvency Service of Ireland and the creditors. The PIP is required for example to consider whether a debtor may avail of the options available under the personal insolvency legislation as an alternative to bankruptcy. The PIP is required to undergo an examination and to apply for registration as a PIP before he or she can operate within the State. Further, by S. 14 of the Bankruptcy Act 1988, a court shall, before making an order of adjudication, consider whether the debtor’s inability to meet his engagement could be more appropriately dealt with by a personal insolvency arrangement or a debt settlement arrangement, and the court hearing a petition in bankruptcy must be satisfied that this option has been explored by a PIP who has considered the alternatives and whose professional view is a factor taken into account by the bankruptcy court. All interactions that the debtor has with the Insolvency Service of Ireland, on the one hand, and the court, on the other hand are through the PIP, and this puts the PIP in a unique position of responsibility to the Insolvency Service of Ireland, the court, the creditors and of course to the debtor. That this imports a duty of frankness and full disclosure seems to me to be unequivocal, and while the PIP is not an officer of the court in a true sense, he is a professional engaged with a process in respect of which the court expects a full, professional and objective approach. The PIP may, but does not always engage a solicitor, but the obligation of frankness must be one which the PIP bears personally by virtue of his unique role at the centre of the process, and as the person uniquely with standing to bring application to the court.”
5. It is argued in particular that because of the central and unique role played by the PIP in the personal insolvency process, and because it is the PIP who makes the application, and is responsible for the preparation and presentation of the paperwork, that he ought to be held accountable in respect of the costs of the application. The “event” for the purposes of costs is said to be the granting by me of the order setting aside the extension of the protective certificate on the grounds, inter alia, that the debtor had failed to make full and frank disclosure to the court in making the application for extension.
6. The argument of the Bank is essentially that as I held that the PIP bore personally an obligation of frankness, and arising from his unique role at the centre of the process, he uniquely has standing to bring application under the statutory scheme to the court, his failure to comply with his duty of disclosure to the court means he personally should bear the costs. Had the PIP made full disclosure to the court, it is argued the protective certificate would not have been extended.
Costs against non-parties
7. Under the scheme of the personal insolvency legislation the PIP bears responsibility for processing the application and dealing with the paperwork, but in my view the PIP is still properly characterised as a non-party for the purposes of considering whether costs should be awarded against him. The PIP has a central role in the procedures under the legislation, but he has no personal interest in the result and any order that is made under the legislation is made for the benefit of, or affects, the debtor in his personal capacity, and not the PIP. Thus, the role of the PIP is to some extent analogous to the role of an examiner, or a solicitor or another professional acting in a role, albeit that application for a protective certificate and for the court’s approval of a DSA or a PIA may not be made other than with the assistance of a PIP.
8. The leading judgment on the jurisdiction of the court to make an order for costs against a non-party, and the criteria that are engaged, is the judgment of Clarke J. in Mooreview Developments Ltd. v. First Active Plc. [2011] IEHC 117; [2011] 3 IR 615. In a reasoned, analytical judgment he considered that the jurisdiction to award costs against a non-party who had not been joined to the proceedings, even for the mere purposes of making an order for costs against such party, derived from s. 53 of the Supreme Court of Judicature (Ireland) Act, 1877, which vested in the court a clear jurisdiction in its discretion to award costs against any person, including a person not a party to the litigation. Clarke J. considered inter alia that this broad approach to the jurisdiction of the court “accords with the view that the court should have full control over proceedings before it” (at para. 3.28)
9. The judgment of Clarke J. in Mooreview Developments v. First Active Plc. dealt with an application for costs against the director of a company in long-running and complex litigation where he was satisfied that the main beneficiaries of the litigation, had it been successful, was that director and his wife. It was clear also in that case that an order for costs against the company, and the other companies in the group of which it was a part, was unlikely to be met. Clarke J. considered that certain factors should guide the court in the exercise of its jurisdiction to award costs against a non-party and he approved a passage from the judgment of Tompkins J. in Carborundum Abrasives Limited v. Bank of New Zealand (No. 2) [1992] 3 NZLR 757, and from which the following principles emerge:
a. It is not necessary to establish impropriety fraud or bad faith on the part of a non-party.
b. If it is the case that that non-party had a “direct personal financial interest” in the result, the court would take into account the fact that a non-party initiated or controlled the litigation, and might derive a financial interest, the court should take into account that he or she should not always be permitted to do so with no risk of costs.
c. Consideration should be given to the fact that if the party to the proceedings is an insolvent company, the reason that party, and not an individual plaintiff or defendant, is in the proceedings ought to have some influence on the court if the non-party may hope to have some financial benefit or gain from the fruits of the litigation, whether by the preservation of assets or otherwise.
d. The court should also take into account the likelihood of costs being met by a corporate entity.
e. The reasonableness of the course adopted by the non-party is also a factor, as is whether the proceedings were pursued in a “reasonable fashion” (per Clarke J. at para. 4.9)
10. Clarke J. helpfully identified the policy reason behind the exercise of this jurisdiction was “to prevent parties having a ‘free ride’ as to how they would conduct litigation, designed for their benefit, without there being any risk of a meaningful cost order being made against them.” That policy reason must in my view be a key to understanding how the court will approach an application for costs against a non-party who is a professional person and who has no direct or indirect interest in the result of the litigation. In the Mooreview Developments litigation Clarke J. was satisfied that it was reasonable to conclude that Mr. Cunningham did have a personal financial interest in the result of the litigation and did make an order that he be personally liable for the costs of the various proceedings.
11. Some assistance can also be found in the judgment of Costello J. in re Wogan’s (Drogheda) Ltd. [1993] WJSC-HC 2783 (delivered on the 9th February, 1993) where he considered the question of whether costs in an examinership, where he had held that the petition seeking protection under the then relevant legislation contained false information which must have been known by the directors of the company, could be awarded against the examiner. The application for those costs was made by the Revenue Commissioners and a creditor who had appeared on the initial application for protection and on the confirmation application. Costello J. held that there was no power under s. 29 of the Companies (Amendment) Act, 1990 to make an order that the examiner should pay costs to any party to proceedings but he did consider that such a power arose under the provisions of O. 99, r. 1 of the Rules of the Superior Courts. Costello J., however, considered that while he did have jurisdiction to award costs against the examiner:
“I do not think that the interests of justice require me to make an order that the examiner should pay the creditor’s costs. I think that such an order might be made in very exceptional circumstances but whilst the circumstances in this case were such as to justify the refusal of an order in the examiner’s favour under s. 29, I do not think they can justify an order against him under Order 99. I must therefore refuse this application.” (at p. 2813)
12. The Supreme Court delivered a judgment on the question of costs which I also find persuasive, in the case of Dunne v. Minister for Environment & Ors. [2007] IESC 60 where Murray J., having outlined the first principle of law, that costs normally follow the event, pointed to the fact that this rule “has an obvious equitable basis”, and must engage the court in considerations of “the interests of justice”.
13. The jurisdiction of the court therefore is one which it exercises in its discretion and in the interests of justice, although the discretion is to be exercised on a reasoned basis and the court is not at large. This principle is well established.
14. The Supreme Court recently delivered a judgment in Miley & Ors. v. Employment Appeals Tribunal & Ors. [2016] IESC 20, on appeal from the High Court which had awarded costs against the EAT following the making of an order of certiorari quashing a determination of that body. The court held that the EAT was entitle prima facie to impunity from costs, it being a statutory tribunal, and because it was not a legitimus contradictor in the litigation and did not take part in the proceedings.
15. Denham J. giving the judgment of the Court went on to consider whether the EAT might have lost its immunity by reason of mala fides or impropriety and was persuaded by the jurisprudence relating to the award of costs against members of the judiciary which while they have been held to have a prima facie immunity, do not have absolute immunity. She held that errors of law or fact are matters of appeal and not matters of impropriety, but that the standard of the hearing was “wanting” and not one that anybody with adjudicative function would “aspire to in this day and age nor was it conduct which participants in proceedings should be required to accept”. It was not however in her view impropriety. The court refused to award costs against the EAT because it was not satisfied that it had acted with mala fides or impropriety.
16. The Supreme Court quoted with approval the judgment of Dunne J. in KCB Private Security v. Appeals Board & Anor. [2009] IEHC 549 that “a complete immunity might be unjust”, but refused to award costs because the Appeals Board was a quasi-judicial body “in a similar and analogous position to that of a judge”.
17. I consider that the closest analogy to the role adopted by a PIP in the procedures under the personal insolvency legislation is that of an examiner, and I have already noted this in the substantive judgment. The PIP does not act in a quasi- judicial manner, but does have a unique and burdensome obligation to the court in the manner in which an application is presented for protection, and a high degree of frankness and trust is required for the process to function in the manner envisaged. In those circumstances there is, it seems to me, no reason in principle why costs could not be awarded against a PIP in a suitable case, although I consider, as did Costello J. in Wogan, that such jurisdiction would be exercised sparingly and in exceptional circumstances.
18. The guiding principle is the interests of justice and certain factors bear on the interests of justice in the present case and to which I have regard. The relevant factors are as follows:
19. The substantive judgment was the first judgment of a superior court on the role of the PIP in the scheme of the personal insolvency legislation, and counsel has informed me that since it was delivered by me only two months ago it has been opened before every specialist judge of the Circuit Court. The interests of clarifying the law therefore were served by the litigation and that public interest is one that benefits the operation of the legislation and the practice and procedure of PIPs operating within the scheme and of the specialist judges of the Circuit Court. That factor is one that must bear on my consideration, as does the fact that the PIP in this case was operating in a new legislative scheme where no guidance was available from the superior courts as to the extent and nature of the role of the court.
20. I also consider that some of the criteria and factors outlined by Clarke J. in Mooreview must bear on my decision. In particular, I consider that it is relevant that the PIP has no personal benefit to gain from the application, nor indeed from the personal insolvency process, and it is fair to say that the scale of fees charged by a PIP in these matters is modest.
21. Further, the PIP is required to be engaged by a debtor, and a debtor may not process an application under the legislation other than through the agency of a PIP. This has the effect that while an individual PIP may of course refuse to act for a debtor, or may cease to act for such debtor, it is almost inevitable that once a PIP commences the process on behalf of a debtor he or she will remain with the process until it reaches a conclusion, whether as a result of a creditors’ meeting and the approval of a court of a DSA or a PIA, or because the process is discontinued or fails.
22. A PIP does have to exercise a high degree of scrutiny, but I am not satisfied in this case that the PIP was fully informed by the debtor with regard to some of the matters which led to my decision, and in particular, while the PIP did know, or must have known, of the various adjournments of the bankruptcy petition and the extent to which they were contested, I consider that the failure of the PIP to deal adequately with the investments and projected income and capital from the investments of the debtor, that this arose more because, in my view, the PIP did not sufficiently engage with the detail of those investments, rather than from any mala fides on his part, or because he failed to address the issues in regard to those investments at all. I consider that the PIP who is an experienced accountant and insolvency practitioner did fail to engage with many of the assumptions made by Ernst & Young, whose report was at the time of the application for the extension of the certificate, two years old and was based on projections and contingencies which had not yet been realised. His approach to the financial circumstances and projections was cursory and did not sufficiently and coherently engage with those factors. This did not arise in my view as a result of mala fides and the primary blame must in my view lie with the debtor who himself was an experienced businessman.
23. For these reasons, it seems to me that I ought not award the costs of the application to set aside the extension of the protective certificate against the PIP, as to do so would not be in the interests of justice, would fail to have regard to the fact that this legislation is new and still relatively untested, that the PIP did not act mala fides, but rather perhaps carelessly or without sufficient and detailed engagement with the facts, and because he had no personal benefit to gain from the application.