PIA Confirmation
Cases
Varma (a debtor), Re
[2017] IEHC 218 (06 April 2017)
JUDGMENT of Ms. Justice Baker delivered on the 6th day of April, 2017.
1. This judgment is given in an appeal by Siddhartha Varma (“the debtor”) from an order of the specialist judge of the Circuit Court, Judge Lambe, made on 2nd February, 2017, by which she extended time for Ulster Bank Ireland DAC (“the objecting creditor”) to lodge a notice of objection to the coming into effect of a proposed Personal Insolvency Arrangement (“PIA”).
2. The debtor made a proposal for a PIA which was rejected at a meeting of creditors on 4th January, 2017. On that date, Mr. Colm Arthur, the Personal Insolvency Practitioner (“the PIP”) issued a notice of motion pursuant to s. 115A(9) of the Personal Insolvency Acts 2012 – 2015 (“the Act”), that the court would approve the coming into effect of a PIA notwithstanding the rejection of the arrangement at the statutory meeting of creditors.
3. The legal questions arising for determination are as follows:
(a) Whether the time limit provided in the statute for the lodging of a notice of objection is one that is capable of being extended.
(b) Whether the special judge of the Circuit Court has jurisdiction to extend the time.
4. Whether the specialist judge was correct in the present case in making the decision to extend time also falls for consideration, as do the matters required to be considered in the exercise of such discretion, should a discretion exist.
Time limits under the Act
5. Section 115A provides for the first time a mechanism by which a PIP may seek approval of the court of a PIA notwithstanding its rejection at a statutory meeting of creditors. The power is far reaching, and involves the court making an order by which the contractual arrangements between a debtor and creditor may be varied, and as a result of which the variation is binding on all creditors.
6. The procedural rules governing an application under s. 115A are set out in the section and in O. 73 of the Circuit Court Rules (S.I. No. 317 of 2013)
7. Order 73, r. 29A(1) provides that application under s. 115A is to be brought not later than fourteen days after the meeting of creditors by notice of motion on notice to each creditor concerned. The time limit is mandatory and no provision exists for the extension of time: Re Hickey & Personal Insolvency Acts [2017] IEHC 20.
8. The process of application to the court under s. 115A having been commenced by the debtor’s notice of motion, s. 115A(3) provides for service of the notice of motion on “all creditors concerned” and for the service of a notice making provision for opposition by creditors to the application:
“(3) A notice to a creditor under subsection (2) shall be accompanied by a notice indicating that he or she may, within 14 days of the date of the sending of the notice, lodge a notice with the appropriate court, setting out whether or not the creditor objects to the application, and the creditor’s reasons for this.”
9. The form of a notice of objection is provided in Form 52D of the Schedule of Forms in the Circuit Court Rules, entitled “notice of objection”, and is required to specify the reason for the objection by the creditor to the application.
10. A debtor who lodges a notice of objection is required under s. 115A(4) to serve a copy of the notice on the Insolvency Service of Ireland, the PIP and each other creditor concerned.
11. The debtor argues that a strict time limit exists for the lodging by a creditor of a statutory notice of objection and that the statutory provisions must be construed as precluding a power of the court to extend that time limit.
12. For the purposes of making a determination under s. 115A, the appropriate court is required to hold a hearing by virtue of the provisions of s. 115A(6):
“The appropriate court, for the purpose of an application under this section, shall hold a hearing, which hearing shall be on notice to the Insolvency Service, the personal insolvency practitioner and each creditor concerned.”
13. Certain matters are to be noted with regard to how the procedure for the making of application under s. 115A envisages service on, and the engagement by, all creditors at the court hearing. Service and participation in the hearing is not confined to those creditors who serve a notice of objection.
14. Section 115A(7) requires that the hearing shall be held “with all due expedition”. Order 73, rule 29A(3) provides for the early listing of the proceedings, not less than 21 days after the issue of the notice of motion. Order 73, rule 5 gives the court a wide discretion to make directions for the conduct of the matter, including directions in regard to the exchange of affidavits, delivery of written submissions and if necessary the hearing of oral evidence.
15. The process then is envisaged as being one in which the debtor and all creditors are entitled to participate and is envisaged as an inter partes hearing.
Is the time limit under section 115A(3) mandatory?
16. In Re Hickey & Personal Insolvency Acts, the statutory period for the lodging by a debtor of a notice of motion by way of appeal under s. 115A(2) was held to be a mandatory time limit in respect of which no jurisdiction to extend exists. The language of s. 115A(2) is expressly mandatory, or in the language of Finlay Geoghegan J. giving the judgment of the Court of Appeal in Law Society of Ireland v. Tobin & Anor. [2016] IECA 26, “clear and unambiguous”.
17. The various factors in the express language of s. 115A(3) and the nature of the right of an objecting creditor to be heard require a different consideration.
18. The Act is silent as to the effect on the engagement a creditor may have at the hearing of the motion under s. 115A when that creditor has not lodged a notice of objection. It seems evident that the purpose of the notice of objection is to provide a form of pleading which sets out the basis of the objection, and that interpretation is consistent with the general requirement that the hearing be held with expedition and in a manner “likely to minimise the costs of the proceedings” (Order 73, rule 5(1)). The purpose of the notice of objection is to foster expedition and to provide a cost effective means by which the hearing is to be conducted, and this is also consistent with the express provisions in the Rules by which the court may make case management directions.
19. However, I do not consider that the language of s. 115A(3) is sufficiently similar to the language in s. 115A(2) to lead to the same conclusion with regard to the mandatory nature of the time limit. This is for a number of reasons: the fourteen day time limit is found in a subsection directed to the debtor and which regulates the form of notice to be given to the creditors of the making of the application under s. 115A. The word “shall” appears in s. 115A(3), but that mandatory direction regulates the form of the notice to creditors, and not the time limit within which the creditor is to lodge the notice of objection in statutory form. Section 115A(3) does not in its own terms prescribe a time limit for the lodging of the notice of objection, but rather it mandates the PIP to notify a creditor of the right to lodge the notice of objection. A creditor has a right to lodge a notice of objection within fourteen days, but the fourteen day time limit is not found in a free standing and mandatory direction which regulates the time limits.
20. In Law Society of Ireland v. Tobin & Anor., the Court of Appeal was considering an application to extend the time for an appeal from the High Court to the Court of Appeal under s. 12 of the Solicitors (Amendment) Act 1960. The section provided that either the Society or a solicitor “may appeal” within the period of 21 days. Finlay Geoghegan J. rejected the submission that s. 12 was to be construed as if the Oireachtas intended that no appeal should lie unless it was lodged within 21 days, and that any appeal lodged outside that time limit was excluded. The Court of Appeal held, by reference to the decision of the Supreme Court in McDonald v. Bord na gCon [1965] I.R. 217 that the Act did yield a result that excluded an appeal lodged outside the 21 day period, and that a constitutional interpretation of the statutory provisions could do so only if the exclusion was clear and unambiguous:
“Were it not for the pre-existing constitutional right to appeal such a construction might be correct. However the constitutional right, and consequent necessity for ‘clear and unambiguous’ words to limit or exclude it require a different conclusion.” (para. 21)
21. Eagar J. considered the conclusion of the Court of Appeal in his recent judgment in Curran v. Solicitors’ Disciplinary Tribunal [2017] IEHC 2, and held that the time limit for an appeal against a finding of the disciplinary tribunal was mandatory and incapable of extension, and that the facts were to be distinguished from those in Law Society of Ireland v. Tobin & Anor., as the case before him concerned an appeal from a decision of a statutory body. No constitutional right to appeal was engaged and, therefore, Eagar J. held that the construction, for which Finlay Geoghegan J. contended, where a constitutional right was engaged, was inapplicable.
22. A debtor making an application under s. 115A who is required by virtue of s. 115A(2) to lodge the notice of motion within fourteen days of the meeting of the statutory meeting of creditors is engaging a statutory and not a constitutional right, and that the statutory time limit is similar in nature to that identified by Eagar J. in Curran v. Solicitors’ Disciplinary Tribunal. This is the conclusion in Re Hickey & Personal Insolvency Acts.
23. On the other hand, an application under s. 115A could have an impact on the contractual rights of that creditor, and as a result the property rights of the creditor could be significantly impaired. A creditor is entitled to be heard both under the express words of the statute and as a matter of constitutional fairness. By way of illustration, the proposed PIA in the present case makes provision for the writing down of the secured debt of the objecting creditor by a sum in excess of €100,000. Furthermore, s. 115A provides for a hearing by the relevant court of the application of the debtor and no express provision is contained by which a creditor who has not lodged a notice of objection is not to be heard. Indeed, each creditor concerned with a proposed PIA is expressly required to be on notice of the hearing by s. 115A(6):
“The appropriate court, for the purposes of an application under this section shall hold a hearing, which hearing shall be on notice to the Insolvency Service, the Personal Insolvency Practitioner and each creditor concerned.” (Emphasis added)
24. For these two reasons, therefore, the fact that a property right in a debt is capable of being adversely affected by the hearing, and because the Act does not expressly preclude the hearing by the court of a creditor who has not lodged a formal notice of objection, I do not consider that the time limit under s. 115A(3) is to be regarded as mandatory, and, to use the language of Finlay Geoghegan J. in Law Society of Ireland v. Tobin & Anor., there are no “clear and unambiguous” words which would enable me to conclude that the time limit is mandatory and not capable of being extended.
25. I am satisfied too that because constitutional rights are engaged at the hearing of the application under s.115A an interpretation of the section requires a construction which is consistent with the Constitution and would require that fair process be imported as has been recognised in the leading case of Dellway Investments Limited & Ors. v. NAMA & Ors. [2014] 4 I.R. 1.
26. For all of these reasons, therefore, I conclude that the objecting creditor is correct, and that the fourteen day time limit specified in s. 115A(3) is directory rather than mandatory in nature and capable of being extended.
Power to extend time
27. The debtor argues that the specialist judge of the Circuit Court has no inherent power to extend time and that, therefore, even if it can be said that the fourteen day time limit is capable of being extended, no power exists by which the specialist judge of the Circuit Court can exercise that jurisdiction.
28. In Law Society of Ireland v. Tobin & Anor., the Court of Appeal extended time for appeal in the exercise of its inherent jurisdiction derived “from the implied constitutional principles of basic fairness of procedures” and because a party “may not be unfairly precluded from pursuing a constitutional right of appeal”.
29. Part 6 of the Act deals with the power of the specialist judges of the Circuit Court, and s. 189 inserts s. 26A into the Courts (Supplemental Provisions) Act 1961, as follows:
“(6) A specialist judge may, in any place in the State outside a relevant circuit, hear and determine any application which he or she has power to hear and determine within that circuit … .”
30. The specialist judge therefore may exercise only those powers and jurisdictions conferred by statute. The specialist judges of the Circuit Court by statute have been vested with the power to make any order that may be made by a County Registrar under s. 34(1) of the Second Schedule to the Court and Court Officers Act 1995 (“the Act of 1995”). An express power to extend time is contained in Section 1(iii) of the Second Schedule to the Act of 1995:
“An order for the enlargement of the time for doing any act or taking any step in an action or matter.”
31. The provision is clear, and the specialist judge, having the jurisdiction of a County Registrar, may extend the time for the doing of any act, including the lodging of any notice. The power of a specialist judge is constrained by any statutory provision to the contrary, as is found in section 115A(2).
32. For those reasons, I do not propose engaging the question of whether, in the absence of an inherent jurisdiction by the specialist judge, the High Court hearing an appeal from a decision of that judge may exercise its inherent jurisdiction. The power to extend time is one conferred by statute upon the specialist judge, and therefore I conclude that the specialist judge had a power to make the order in respect of which this appeal is brought.
Extension of time in the present case
33. The specialist judge extended the time for the lodgement by the creditor of a notice of objection. The debtor argues that she was incorrect as the application was not grounded on affidavit and she had no factual basis on which she could come to the conclusion she did. The debtor argues that the jurisprudence that has evolved since the leading judgment of the Supreme Court in Eire Continental Trading Company Limited v. Clonmel Foods Limited [1955] 1 I.R. 170, must guide the court regarding that the matters which fall for consideration on such an application namely:
(a) that the applicant shows that he has a bona fide intention to appeal formed within the permitted time;
(b) he must show the existence of something like mistake, mistake as to procedure or as to the meaning of the relevant rule not being sufficient for this purpose; and
(c) he must establish an arguable ground for such appeal.
34. No evidence was adduced on affidavit before the Circuit Court in the circumstances explained in the affidavit of Conor Moore filed and sworn on 24th February, 2017 for the purposes of this appeal. It seems that counsel attended at the hearing to explain to the specialist judge that a delay in lodging the notice of objection had occurred due to an administrative error in the classification of an email report. Watch Portfolio Management (Ireland) Limited (“Watch”) had been authorised to lodge the proofs of debt and deal generally with the procedural requirements of the insolvency process, and had been served with copies of the notice of motion and the other relevant documents prescribed by statute, but the email from Watch, forwarded to the objecting creditor, was not delivered, due to the number and size of the attachments, although the classification on the email server of Watch showed the documents as having been delivered.
35. Counsel appeared at the hearing before the specialist judge to say that the objecting creditor wished to object to the application and explained the delay in lodging notice of objection by way of submission, and offered affidavit in support. It is correct in those circumstances to say that at the date of the order extending the time, the specialist judge did not have evidence on which she could come to the decision to extend time. If the test in Eire Continental Trading Company Limited v. Clonmel Foods Limited is relevant then the necessary factual elements were not established by evidence.
36. A number of observations are to be made. I am not satisfied that the test in Eire Continental Trading Company Limited v. Clonmel Foods Limited is relevant or useful as a guide to the factors that might influence the specialist judge in deciding to extend time. The notice of objection cannot be characterised as an appeal, and it forms more the function of a pleading by way of defence, or identification of the issues and factual bases on which the objection will be maintained.
37. It seems to me that the approach of the specialist judge, in considering whether to extend time for the doing of any act or taking of any step in an insolvency matter in respect of which he or she has jurisdiction to extend time, will be one that is exercised in the broad discretionary framework in which an extension of time may be granted, including that the specialist judge is satisfied with the nature of the explanation given, that the extension is not sought merely as a means of delaying the process, a factor of particular importance having regard to the statutory imperative that the hearing is to be conducted with due expedition. Another factor that would come into consideration would be whether the objecting creditor had voted against a PIA at a meeting of creditors, and whether the creditor had lodged a proof of debt and engaged with the process to date.
38. Counsel for the objecting creditor argues for a general rule that the court would extend time for the delivery of a notice of objection, albeit that an extension of time might be granted on terms that costs be awarded to the debtor. Reliance is placed on the judgment of O’Sullivan J. in Ewing v. Kelly [2000] IEHC 58, where the High Court was dealing with the extension of time for the delivery of a pleading.
39. I do not propose stating a general rule, save to say that the scheme of the personal insolvency legislation, and the power granted to the specialist judges of the Circuit Court under the Act, does permit the extension of time, and that the factors that might influence the granting of an extension of time are discretionary factors, the elements of which are a matter for the forum in which the matter is argued, and to be dealt with in the light of relevant discretionary factors, some of which have been identified by me above.
40. For all of the reasons stated, I consider that the application to extend time was made within jurisdiction and for good cause, and I propose therefore rejecting the appeal of the debtor against the order of 2nd February, 2017.
Thomas O’Connor, a debtor
[2016] IEHC 317
Ex tempore JUDGMENT of Ms. Justice Baker delivered on the 18th day of April, 2016. (Transcribed from DAR recording)
1. This is the first time an application comes before me pursuant to the provisions of s.115 (a) (9) of the Personal Insolvency Act 2012 which was inserted by the Act of 2015. This particular statutory provision was clearly designed as a means by which the Oireachtas showed its intent to enable a suitable applicant to seek to preserve his or her entitlement to remain in occupation of a family home.
2. It is therefore a peculiar statutory regime, which protects certain right of the debtor seeking the protection of the personal insolvency legislation, if it can be shown that the circumstances justify the protection of the family home. It places in those circumstances the family home creditor in a different category to that in which other creditors have been placed by the legislation.
3. I am satisfied in this case that the debtor, Thomas O’Connor of Gorey, County Wexford does have a mortgage on his family home, which is a relevant debt for the purposes of the Act of 2012 and in particular the provisions inserted by the new Act of 2015.
4. I am satisfied in particular that he has a mortgage on his principal private residence, what we sometimes call a family home, and that that is within the definition of the Act a sustainable mortgage.
5. I am satisfied in the circumstances that that debt is a relevant debt for the purposes of the application and that accordingly it is what I might call a triggering debt: once a debtor can show that he or she has a debt of that class, then the fact that a Personal Insolvency Arrangement was not accepted by creditors at a meeting does not of itself mean that the Personal Insolvency Arrangement will fail.
6. The Personal Insolvency Arrangement was put to a meeting of creditors on the 10th February, 2016 and although a number of the creditors supported the application and the family home mortgage creditor accepted it entirely, there being only one, the result of the meeting was that some of the creditors, one creditor really, refused to consent to the Personal Insolvency Arrangement. That creditor is Pepper, Pepper Finance Limited, which is an investment fund. While Pepper voted against the Personal Insolvency Arrangement, it has not attended at this hearing to oppose the application sought by Mr. O’Connor, nor did it object to the coming into force of the Personal Insolvency Arrangement when this application was issued.
7. I am satisfied in the first place that service on all the relevant creditors has been shown. I am also satisfied that this is an unusual application also in the context of the personal insolvency legislation, in that it is an application which is triggered by the debtor himself.
8. I am satisfied that Mr. O’Connor did instruct his personal insolvency practitioner, Ms. Kerry O’Neill to bring this application, which is brought pursuant to the legislation, and he did so by a letter of the 12th February, 2016. I am satisfied that the requisite notice was served on creditors by Ms. O’Neill on the 26th February, 2016, notifying them that they were entitled to object to the application sought to be brought before me, and I am satisfied also that they were served with all of the necessary paperwork.
9. Therefore, I am satisfied that in the circumstances, the application is properly before me.
10. The Act requires me to be satisfied with regard to a number of matters, in particular whether the circumstances are such that there is a reasonable prospect that the debtor will resolve his or her indebtedness without recourse to bankruptcy. That is a general requirement for the purposes of the protection of the legislation and I am satisfied that those proofs are met.
11. I am also satisfied that the particular proof required for this application, namely, that the proposed arrangement will enable the debtor not to cease to occupy his family home or his principal private residence has been met. This is what one would call a sustainable mortgage and it is, as I am satisfied from the affidavit evidence that the accommodation, the principal private residence of Mr. O’Connor, where he resides with his wife and three children, is suitable for his needs and appropriate in all of the circumstances.
12. I am also satisfied that he has satisfied me with regard to one of the other proofs of the Act, namely, that he has been seeking in the last two years to pay the mortgage debt and I am satisfied from his bank statement that that is so and that he has been meeting the mortgage payment.
13. I am also satisfied that the Personal Insolvency Arrangement is fair to all the creditors, but more importantly for the purposes of this application, because the Oireachtas inserts a requirement that the court assess the proportionality of the proposed arrangement, I am satisfied that the arrangement which allows for the protection of the family home is not disproportionate, and I am also satisfied that the other tests of the Act are met, the primary one being for these purposes that the return for creditors will be better than the return that they could hope to achieve were there to be a bankruptcy.
14. The Act of 2015 is a unique piece of legislation in that it enabled the court to limit the extent of the veto which a creditor might have in respect of a family home or a principal private residence mortgage debt, and it allowed for separate treatment of that class of debt and there was clearly an intention by the Oireachtas to offer a particular and unique protection for that property. That protection is indeed found in other areas of the law, but it is the first time that it has been found within the context of insolvency.
15. I am satisfied that the proofs are met and I am satisfied that Mr. Farry has presented the application fairly to all of the creditors, which I think is his obligation as an officer of the court, that his paperwork has been presented in a very clear and fulsome way and I am satisfied to make the order sought in the Notice of Motion pursuant to s.115(a) of the Personal Insolvency Act, approving the Personal Insolvency Arrangement, notwithstanding that the result of the creditors meeting was not one which approved that arrangement.
16. This ruling was given ex tempore, and the application was not opposed. The reasoning herein contained should be understood in that context.
McManus & Personal Insolvency Acts 2012
[2016] IECA 248
Ex TEMPORE JUDGMENT of the President delivered on 22nd June 2016
1. There is great urgency about this matter and the court proposes to give judgment now.
2. Anyone is aware that there are perils in ex tempore judgments. Reports of decided cases draw particular attention to the frailties that arise in the case of ex tempore judgments. In this case, there are a number of exacerbating features. The first difficulty is the pressure of deciding the case today. Because of the demands on the court’s work, we do not have the luxury of reserving judgment, bearing in mind the other work obligations that the court has. The second difficulty is my unfamiliarity with this area of jurisprudence. The third difficulty is the poor quality of the materials submitted. I remain critical of this, but I was particularly struck by the contrast between the quality of the written materials and the high quality of the oral submissions.
3. This case is an appeal against the judgment of Baker J. in the High Court delivered on 27th May 2016. The application was made under s. 97 of the Personal Insolvency Act 2012. The application came before the court on a notice of motion.
4. The background to the case is outlined in the judgment of Baker J. wherein she says that on 11th February 2016, the High Court issued a Protective Certificate to the Debtor pursuant to s. 95(6) of the Personal Insolvency Acts 2012 to 2015. On 18th April 2016, the period of protection was extended.
5. The application concerns the judgment obtained by the creditor, Clones Credit Union Ltd. Clones Credit Union Ltd. brought its application in circumstances where it had got liberty to enter judgment against the Debtor on 27th October 2015. This matured into a judgment mortgage on 19th November 2015. Bearing in mind the date of 11th February 2016, this judgment mortgage fell short of the three months space that was required in order to give it immunity under s. 102, sub-section (7) of the legislation.
6. In the High Court, Clones Credit Union brought an application to invoke the facility under s. 97 of the Act whereby, on satisfying the court of the requirements in the section, it could have its debt excluded from the operation of a personal insolvency arrangement entered into by the Debtor. There are a number of affidavits filed on behalf of the Credit Union, but principally the affidavits of Mr. Jenkinson and Counsel relies and relied in the High Court on the contents of that affidavit. It seems to be that there is reason to be uneasy about the materials and matters that were raised in the course of the affidavits, specifically, the materials that were put before the High Court in Mr. Jenkinson’s affidavits. I think there are considerable reasons to be concerned about the contents of those affidavits.
7. It seems to me that the court is concerned, and concerned only with the provisions of s. 97. I do not agree with Counsel that the court has a parallel application of inherent jurisdiction. There was a debate about the provisions of s. 97(1) and whether the extent to which a range of grounds may be invoked in order to apply under s. 97(1) of the Act. Again, for the purpose of this application, it is not necessary to make any declaration about that. It would also be inappropriate, in a brief ex tempore judgment held urgently, to attempt to make any definitive point in that regard.
8. It seems to me that it comes down to sub-section (3) and whether Baker J. was correct in her analysis of sub-section (3). I also think that sub-section 3(b) can be excluded, not because it would not be relevant in the case, but that is not covered in the notice of appeal. The court has to be satisfied that if it did not make an order excluding the particular creditor that this party will suffer irreparable loss. Not only that, the irreparable loss has to be such that it would not otherwise have occurred. Counsel is correct in saying that he starts off as a secured creditor, but when the order is made by the High Court and he does not have a period of three months, he ceases to be a secured creditor for the purpose of this provision. The fact that he goes from secured to unsecured is not a relevant consideration in the issue. However, this is not what Baker J. decided in the High Court. From paras. 34 of her judgment, Baker J. applied two criteria. The judge said that there was a discretionary element to this, that it was logical and rational to be mindful of the disclosure or non-disclosures by the Debtor to the court in relation to the applications concerning the summary judgment. We have here a clear, definitive statutory provision in s. 97(3)(a). Is it the case that not making the order will result in irreparable loss to the Credit Union that it would not otherwise have suffered?
9. I cannot see how the circumstances are such that those two criteria can be met by the Credit Union in the present application. It is possible for the Credit Union, in the event that there is a personal financial arrangements in place, to apply under s. 114/s.120 on the grounds listed in s. 120. They do not include any challenge that they might decide to make in respect of the transactions for the purpose of providing some finance that will in turn enable the arrangement to go through. The challenge thereto is not specifically included in s. 120, but it may still be brought under different parts of the regime. I do not see the failure to attack that as being a ground for sustaining irreparable damage that would not otherwise be sustained. In other circumstances, I think the position of the Credit Union is no different from any other creditor who may claim to be in a particular situation. It is clear that this is not what the section means.
10. I do not find that the rationale for s. 97(3)(a) is satisfied, namely, irreparable loss which would not otherwise occur. I think this appeal has to be allowed. I cannot find grounds in the materials that were before the High Court and now before this Court to establish those twin elements. On the strict application of the section, I cannot find myself in agreement with Baker J. and I would accordingly allow the appeal.
Finlay Geoghegan J.
11. I too am in agreement that this appeal should be allowed.
12. I would echo what has been said by the President as to the assistance given by both Counsel to the court in their oral submissions in understanding the legislative intent and the structure of this new form of personal insolvency procedure to the High Court. I am in agreement that the matter must be determined as an appeal against an order made pursuant to s. 97, as it was in the High Court, and the application to the High Court on the notice of motion was for an order pursuant to s. 97 against the continuation of the Certificate against the individual creditor and the actual order made was an order pursuant to s. 97 that the Certificate is not to apply to the Clones Credit Union Ltd.
13. I am also in agreement that this appeal must be determined within the confines of s. 97 and that any parallel application which might be made pursuant to an inherent jurisdiction of the court was not made in the High Court and is a separate matter. It does appear to me that the legislation potentially distinguishes, as was referred to in the Nugent judgment, an application to set aside in its entirety the Protective Certificate, and the much more limited application envisaged by the legislature under s. 97 that a Protective Certificate shall not apply to the individual objecting creditor. Like the President, I do not propose making any observations about what grounds may be permissible to be relied upon under s. 97(1), that should be left over for another day because irrespective of what grounds a creditor may seek to put before the court under s. 97(1), it appears to me from the clear wording of s. 97(3) that a court must be satisfied of the matters set out in (a) and (b). It is, on this appeal, the appeal against the finding of the High Court judge under s. 97(3)(a).
14. In my judgment, the High Court judge, at para. 34 of her judgment, correctly observed, in relation to the section “I consider that for a creditor to seek relief under s. 97, it is necessary to show that something other than the ordinary statutory consequence of the issue of the Protective Certificate has occurred”. In my judgment, where she fell into error was in para. 35 of her judgment where she considered that the particular prejudice, and I think by that she meant the irreparable loss to the Credit Union was that it may not bring the proceedings to set aside the securities which had been granted and registered in favour of the parents and Mother-in-law of Mr. McManus on a date that was prior to the date of registration of the judgment mortgage in favour of the Credit Union and she observed that if Mr. McManus is in a position to put before his creditors an acceptable proposal for a personal insolvency arrangement, the Credit Union loses any right or entitlement to move to set aside the charges and that the value of the debt will suffer a significant diminution.
15. In submission, Counsel on behalf of the Credit Union, made essentially two submissions but one part fell into three different parts in relation to what he said was the irreparable loss. The first was that the Credit Union, by reason of s. 102, sub-section (3), for the purposes of the personal insolvency procedure is to be treated as an unsecured creditor. Secondly, that it cannot sue, not just in respect of the charges, but it cannot execute its judgment against any property of Mr. McManus or may be delayed in the execution and that arises by reason of the provisions, he submits, of s. 96(1) of the Act. I would simply observe that s. 96(3) does permit of an application to the court, but any leave would have to be granted in the context of the legislative purpose of this entire scheme.
16. On any of those bases, the detriments which Counsel relies upon before this Court are precisely the ordinary statutory consequence of the issue of the Protective Certificate in this instance. It appears to me that the Oireachtas, in specifying in s. 97(3)(a) that a creditor who makes an application under s. 97 (for an order that the Certificate should not apply to that individual creditor) must satisfy the court that not making such an order would cause “irreparable loss” envisages loss of a nature which goes beyond the ordinary statutory consequences of the issue of a Protective Certificate. I consider that interpretation is reinforced by the entire legislative scheme of putting in place what is really a breathing period by the issue of the Protective Certificate and then giving creditors the ability to object to a personal insolvency arrangement, albeit that it has been voted in favour of by virtue of s. 114 on the grounds set out in s. 120 and the matters which Counsel really wants to bring to the attention of the court are matters which are capable of, at that point in time, if it is though appropriate, being brought to the attention of the court.
17. For those reasons, I too would allow this appeal.
Irvine J.
18. Like my colleagues, I will also allow the appeal and I would do so because I am satisfied that the trial judge fell into error when she concluded that the applicant had discharged the statutory burden which is imposed on it when it seeks relief under s. 97(3)(a) of the 2012 Act. I agree with Finlay Geoghegan J. that when the trial judge relied upon or looked for the existence of irreparable loss, she relied upon the fact, at para. 35 of her judgment, that the Credit Union would be denied the opportunity to bring proceedings to set aside the security to be afforded to Mr. and Mrs. McManus on foot of the agreement of 2nd November 2015. It is very clear to me that the Credit Union is debarred from making that challenge by virtue of the provisions of s. 96(1) of the Act. In my view, their loss of that right is an inevitable consequence of the provisions of the Act itself and it is precisely what the Oireachtas intended to flow as a consequence of the issuance of a Protective Certificate. Again, like Finlay Geoghegan J., I note that arguments have been raised in relation to other prejudice by Counsel, namely the fact that he has suffered irreparable loss because he has been moved from a position of secured creditor to unsecured creditor. However, that occurs again as an inevitable consequence of the Act under s. 102, sub-section (7). As to the prejudice alleged to arise from his inability to sue out on foot of his judgment, simpliciter or otherwise execute his judgment that flows from s. 96(1). Finally, the delay upon which he relies, namely the 150 days during which he is to some extent neutered in terms of his rights that applies to all other creditors and again, is an inevitable consequence of the Act. In my view, he did not discharge the burden imposed on him under s. 97(3)(a) of the Act, and for those reasons I am satisfied that the trial judge erred such that I would allow the appeal.
Reilly & Personal Insolvency Acts 2012-2105
[2017] IEHC 558
JUDGMENT of Ms. Justice Baker delivered on the 5th day of October, 2017.
1. John Donnan the personal insolvency practitioner (“PIP”) made a proposal for a Personal Insolvency Arrangement (“PIA”) on behalf of Darren Reilly (“the Debtor”) under the Personal Insolvency Acts 2012-2015 (“the Act”) pursuant to his function in that regard. The proposal did not receive the requisite support of creditors at a meeting of creditors held to consider the proposal on 23rd November, 2016.
2. An application was lodged pursuant to s. 115A that the court would approve the PIA notwithstanding the result of the vote at the meeting of creditors.
3. By order of 1st June, 2017 His Honour Judge William G. Lyster, specialist judge of the Circuit Court sitting at Monaghan Circuit Court determined to refuse the application under s. 115A(9) of the Act.
4. The decision of the specialist judge has been appealed and this judgment is given in a preliminary issue raised by Bank of Ireland (“the Bank”), viz whether the notice of appeal dated 7th June, 2017 from the order of the specialist judge is properly constituted. The preliminary issue to be determined is one of some importance as the Bank argues that the appeal is not validly brought as it was not made by the PIP, but rather by the Debtor himself. The Bank argues that the appeal must fail as the involvement of a PIP in all stages of the process, including an appeal from a determination by the Circuit Court, is mandatory in all applications under the Act.
5. Counsel for the Debtor has argued that as he is the person whose interests are affected by the appeal he has sufficient locus standi to prosecute the appeal.
6. This judgment does not concern itself with the merits of the appeal, or whether the specialist judge of the Circuit Court was correct to refuse to confirm the coming into operation of the PIA notwithstanding the objection of the Bank, and is concerned with the role of the PIP in the insolvency process, and where the engagement of the PIP ends. It also concerns itself with the broad question of the interplay between a debtor and the PIP.
Background facts and procedural steps
7. A meeting of creditors was held on 23rd November, 2016 at which the proposed PIA was considered. KBC Bank Ireland plc, holding a debt of approximately €600,000, voted in favour of the PIA, but the Bank, which holds a debt of almost €720,000, and holds security over the principal private residence of the Debtor, voted against the proposal.
8. By notice of motion in statutory form dated 24th November, 2016 application was made to the Circuit Court for a review pursuant to the provisions of s. 115A(9) of the Act, that the court would approve the coming into effect of the PIA notwithstanding its rejection by the relevant class of creditors. That notice of motion was signed by the PIP and addressed to all relevant parties, and identified that solicitor or counsel on behalf of the Debtor would move the application. The application was grounded on an affidavit of the PIP.
9. The Bank through its solicitors lodged a notice of objection on 14th December, 2016, again in the statutory form.
10. A long affidavit of Jane Boland, an agent of the Bank, was sworn on 15th February, 2017 to ground the Bank’s objection, and that was followed by a replying affidavit from the Debtor, sworn on 8th March, 2017, a replying affidavit on behalf of the Bank sworn on 20th March, 2017 and from the PIP sworn on 27th April, 2017.
11. The matter came on for hearing before Judge Lyster, specialist judge of the Circuit Court on 4th May, 2017, who having reserved his judgment, delivered a ruling on 1st June, 2017 in which he declined to make the order.
12. It is with regard to the notice of appeal to the High Court that the issue now sought to be determined arises. By notice of appeal dated 7th June, 2017 the Debtor appealed to the High Court against the order of the specialist judge of the Circuit Court. That notice of appeal expressly identifies the appellant as the Debtor, and is signed by his solicitor. The PIP is not a moving party to the appeal and is not a notice party, although the Bank as objecting creditor did serve its memorandum of appearance on the PIP.
The issue to be determined
13. It is the Bank’s case that the appeal to the High Court is wrongly constituted in that it is not made by the PIP but rather by the Debtor himself. The Bank argues that the absence of the PIP, and the fact that the appeal was lodged by the Debtor, and not by the PIP, is fatal to the prosecution of the appeal. The Bank argues that having regard to the scheme of the Act a debtor has no standing to maintain an appeal as the legislation envisages that all applications, including appeals, are to be prosecuted by the PIP.
14. By letter of 20th June, 2017 the solicitors acting on behalf of the Bank consented to the making of an order that the PIP be substituted for the Debtor as appellant in the appeal. That offer was rejected as unnecessary by the solicitor for the Debtor, who noted in her replying correspondence of 22nd June, 2017 that she did not act for the PIP.
15. The question raised is one that engages the construction of the legislation, but also the broader question raised by the Debtor of the right of access to the courts.
Relevant legislative provisions
16. Section 115A(1) states as follows:
“115A. (1) Where—
(a) a proposal for a Personal Insolvency Arrangement is not approved in accordance with this Chapter, and
(b) the debts that would be covered by the proposed Personal Insolvency Arrangement include a relevant debt,
(c) the personal insolvency practitioner may, where he or she considers that there are reasonable grounds for the making of such an application and if the debtor so instructs him or her in writing, make an application on behalf of the debtor to the appropriate court for an order under subsection (9).”
17. The language of 115A (1) is clear and vests in a PIP the power to make an application to the court for a review under subsection (9), where the PIP considers that there are reasonable grounds for the making of such application. Accordingly, the power vested in the PIP is not unconstrained, but is to be exercised in appropriate cases and where the PIP can justify the making of the application on reasonable grounds.
18. It is also clear that the power vested by s. 115A(1) is to make application on behalf of the debtor, the person whose interests are impacted by the application, and I accept the argument of the Debtor in the present case that it is the interests of the Debtor and not those of the PIP that are in play in any application for review by the court. The PIP is not a party to the application in the sense that his or her interests may be affected by the result.
19. Before considering the procedural question raised in this appeal, I turn briefly to examine the question of how the interests of a debtor are dealt with in the legislative scheme, and the interplay between a debtor and a PIP.
Interests of the debtor are affected.
20. Section 2 of the Act defines a debtor as “a natural person who owes a debt to a creditor or otherwise has a liability to a creditor”. A PIA is entered into by a debtor, not by or through a PIP on behalf of the debtor. The jurisdiction of the court is determined by the residence or domicile of the debtor and not of the PIP. The debtor must perform a number of statutory steps before the application is processed, including the step of appointing a PIP. Section 49(3) envisages the debtor engaging with the Insolvency Service of Ireland (“ISI”) before a PIP is appointed. Section 49 provides for a meeting with a PIP or an employee of the PIP in order to advise the debtor as to the feasibility of making a proposal for a PIA or DSA. It is the debtor who appoints the PIP to act on his or her behalf:
“to act as his or her personal insolvency practitioner for the purposes of Chapter 3 or 4, as the case may be”: s. 49 (3),
21. A PIP then acts on behalf of the debtor and with his or her interests in mind. A debtor may terminate the appointment of a PIP, and if he or she wishes to continue with the process by virtue of s. 49A(3) a replacement PIP shall be appointed within two months.
22. A PIP may give notice to the debtor to terminate the appointment under s. 49B(1), and may do so without cause, although notice must be given to the debtor and to the ISI. There is also a power under s. 49C(1)(c) for the appointment of a PIP to be terminated when he or she is no longer authorised to perform the functions of a PIP.
23. Once a PIP is appointed however, he or she takes on a role which is statutory in origin and function, and it is quite clear from the provisions of s. 48 that any person who wishes to become a party as a debtor to a DSA or a PIA must comply with Chapter 2 and must appoint a PIP. The process may not be engaged without that step, and the DSA or PIA may not be concluded without the involvement of a PIP. The PIP under s. 52 must provide advice to the debtor, both in relation to informal debt resolution or resolution by one of the formal means identified in the Act. The PIP is in all of these functions to be independent and to act as a professional and under s. 52(3) the PIP must have regard to various statutory factors in considering the appropriateness of entering into a PIA or DSA. Section 52(5) provides that when a PIP advises a debtor not to make a proposal for or enter into an arrangement then the appointment of the PIP shall come to an end.
24. Thus, the PIP has the role of initiating the process, advising on whether it should be initiated in the first place, and continuing the processing of the application with a view to achieving an arrangement, and having that approved by the court, or where appropriate bringing it to an end without resolution.
25. I agree with the Debtor that the benefit of the application enures to a debtor. I disagree however with the characterisation for which counsel for the Debtor contends, that the role of the PIP is merely procedural. While it is the case that the PIP may not construct a PIA without instructions, and more specifically that the PIA which is proposed must be pursuant to s. 99(1) and “agreed to by the debtor”, the process may not be concluded without a meeting of creditors which must be arranged by the PIP, and s. 115A expressly provides that the PIP lodges application for review. It should also be noted that under s. 115A(2) the PIP must serve notice on the debtor of the lodging of an application under the section, and the procedural requirements of s. 115A(4)(iii), and s. 115A(6)(iv) are that the objecting creditor is to give notice to the PIP, and make no provision for the giving of notice to a debtor of an objection.
26. The question for consideration in this appeal is whether a debtor, whose interests are clearly impacted by a decision of the relevant court under s. 115A(9), has on such account an independent and free-standing right to bring an appeal of a refusal by a court to approve the coming into operation of a PIA.
27. Before considering the procedural requirements of an appeal from an order under s.115A, I will examine the procedural rules governing the making of an application at first instance.
The procedural rules
28. The provisions of s. 115A(1) are reflected in r. 29A of the Circuit Court Rules (Personal Insolvency) 2015, S.I. No. 506 of 2015, the relevant part of which reads as follows:
“29A. (1) An application by a personal insolvency practitioner on behalf of a debtor under section 115A of the Act for an order under section 115A(9) of the Act shall be brought by notice of motion, (which shall include the notice required by section 115A(3) of the Act), in Form 52I in the Schedule of Forms, signed by the personal insolvency practitioner concerned…”
29. Form 52I in the schedule of forms prescribes the form of the notice of motion, the relevant parts of which are as follows:
“TAKE NOTICE that on the………….day of ……… 20…. at ……. in the forenoon or the first available opportunity thereafter, ………… of ………………., personal insolvency practitioner, will apply to this Honourable Court sitting at ……………. for an order under section 115A(9) of the Personal Insolvency Act 2012 on behalf of the above-named debtor, …”
30. The notice of motion must include a certificate of the PIP that he or she considers that “there are reasonable grounds for the making of such an application”, and the grounds must be identified. There is also a requirement that the PIP certify that he or she is of the opinion that the debtor satisfies the eligibility criteria, and that the PIA is compliant with the mandatory statutory requirements. The notice of motion must also have appended to it a copy of the written instructions of the debtor to the PIP.
A question of standing?
31. The Bank argues that, on a plain reading of the clear words of the Act and of the Rules, only a PIP has standing to make application to the Circuit Court for an order under s. 115A of the Act, and for any appeal from an order of that court.
32. Because the PIP lodges an application under s.115A on behalf of a debtor, and because of the nature of the interlay between PIP and debtor explained above, the matter is one of procedural but not substantive standing. I consider that the scheme of the Act, and the statutory provisions and rules made thereunder, mandates a particular means by which the application is to be prosecuted. The debtor is the person directly impacted by the decision, and is the person with an interest to be protected, but the engagement by the PIP at the procedural stages is an essential and mandatory requirement for the proper prosecution of an application under the Act.
33. It should be recalled in that context that the PIA, and the power of the court to review the result of a meeting of creditors, is wholly a creature of statute, and the Oireachtas has determined that application under s. 115A is to be made by a PIP, who must in so doing make a judgement that there are reasonable grounds for making the application. The extent to which the pleadings lodged require a concrete and positive engagement by the PIP cannot be ignored.
34. Such procedural rules are not unknown in corporate insolvency law, and I turn now to examine the relevant authorities.
Argument by analogy: Corporate insolvency law
35. In Southern Mineral Oil Ltd (In Liquidation) & Anor. v. Cooney & Ors. [1997] 3 I.R. 549 the Supreme Court was considering an appeal from an application by the respondents, shareholders in two companies then in liquidation, that the application by the liquidator for an order pursuant to s. 297 of the Companies Act 1963 (“the Act of 1963”) ought to be struck out on the grounds of delay. Lynch J. considered, albeit obiter, the question of the procedural correctness of the application under the section.
36. Section 297 of the Act of 1963 provided for an application to be made by a “receiver, examiner, liquidator or any creditor or contributory” of a company. The applicants were two companies which had been wound up by order of the High Court on the petition of the Revenue Commissioners. Lynch J. noted that the legislative provisions envisaged application to be made inter alia by a liquidator and not by a company and said as follows at pp. 568 & 569:
“None of these statutes provide that the application may be brought by the company in receivership or examinership or liquidation. They provide that the application shall be brought by the receiver or examiner or liquidator, as the case may be, and in all cases the application may also be brought by any creditor or contributory of the company in question. Nor do the provisions of O. 74, r. 49 of the Rules of the Superior Courts lend any support to bringing the application in the name of the company in receivership, examinership or liquidation.
37. While the observations of Lynch J. were obiter, they were expressly approved by Keane J.
38. A similar matter came for determination recently in a decision of Hunt J. in Re: Tucon Process Installations Ltd. (In Voluntary Liquidation) v. The Governor & Company of the Bank of Ireland [2015] IEHC 312. There, Hunt J. relied on the observations of Lynch J. in Southern Mineral Oil Ltd (In Liquidation) & Anor. v. Cooney & Ors. which he considered as:
“ …a correct and precise statement of the law on the legal issue arising in this case, …”
39. Hunt J. was hearing an application commenced by the liquidator in the name of a company in liquidation for an order pursuant to s. 139 of the Companies Act 1990. Hunt J. held that the company did not have locus standi, and that the statutory provision could not be invoked by the company as it was:
“…not within the category of applicant specified by either of the statutory provisions in question.”
40. Hunt J. expressly noted the “plain and ordinary meaning of the words” of s. 139 which had provided for application by “liquidator, creditor or contributory of a company” which is being wound up and went on to say as follows at p. 3:
“In the case of an application brought pursuant to a statutory provision, regard must be had to the plain and ordinary meaning of the words of the statute in determining questions such as standing. The nomination of specific parties as potential applicants expressly precludes such statutory applications being brought by a party other than those specified by the legislature, otherwise the precise words used to legislate for classes of applicant would be deprived of ordinary meaning. As the company is not specified by either statutory provision as being an appropriate applicant, it has no standing to seek relief under either of the statutory provisions invoked in this application.”
41. The judgment of Hunt J. and his reasoning was expressly approved by the Court of Appeal [2016] IECA 2011 where Costello J. at para. 18 took the view that the relevant section:
“…does not vest in the company a cause of action which, by some other provisions of the company code is vested in a liquidator, creditor or contributory of the company. It follows that where the legislature has taken the trouble to specify the parties who may bring application under s.139 it is not open to this Court to extend locus standi to a party upon whom it has not been conferred by the express words of the statute.”
42. The decision of the Court of Appeal, and that of Hunt J. concern precisely the same type of statutory provision as is contained in s. 115A(1). I consider that in light of those authorities, and also noting the clear and unequivocal language in s. 115A(1) itself, that an application for review by the court under s. 115A must be commenced by a PIP on behalf of a debtor, and may not be brought or instituted by a debtor himself or herself. A debtor is not an appropriate applicant.
The role on the PIP on an appeal
43. The question before me however, is not whether the application to the Circuit Court ab initio, was correctly constituted, and no argument is made that it was not, but how the appeal to the High Court from the determination of the Circuit Court is to be prosecuted.
44. Section 96 of the Courts and Civil Law (Miscellaneous Provisions) Act 2013 inserted s. 37(1A) into the Courts of Justice Act 1936 a provision for appeals from a decision of the Circuit Court under the Personal Insolvency Act 2012:
“96. Section 37 of the Courts of Justice Act 1936 is amended by the insertion of the following after subsection (1):
(1A) Notwithstanding subsection (1), an appeal shall lie to the High Court sitting in Dublin from every judgment given or order or decision made (other than a decision to which section 169 (4) of the Personal Insolvency Act 2012 applies) by the Circuit Court in the performance of any function or exercise of any power or jurisdiction conferred on that court by that Act, whether or not oral evidence was given at the hearing or for the determination of the proceedings or matter concerned.”
45. The legislation is silent on the mode of appeal and the power of the appellate court, and the matter must therefore be considered by reference to the power and function of an appellate court, specifically the High Court in a statutory appeal in the exercise of its jurisdiction under S. 37 of the Courts of Justice Act 1936 (“the Act of 1936”).
The jurisdiction of the appellate court
46. The appellate jurisdiction of the High Court hearing an appeal from a decision of the Circuit Court under 37(1) and (1A) is set out in s. 37(2), of the Act of 1936 which provides as follows:
“37. (2) Every appeal under this section to the High Court shall be heard and determined by one judge of the High Court sitting in Dublin and shall be so heard by way of rehearing of the action or matter in which the judgment or order the subject of such appeal was given or made, but no evidence which was not given and received in the Circuit Court shall be given or received on the hearing of such appeal without the special leave of the judge hearing such appeal.”
47. Section 39 of the Act of 1936 states:
“The decision of the High Court on Circuit on an appeal under the Act is final and conclusive and not open to appeal.”
48. The High Court when determining an appeal under s. 37(1A) is hearing an appeal from the Circuit Court, a court of limited and local jurisdiction, established by s. 4(1) of the Courts (Establishment) and Constitution Act 1961. The court is not exercising its full originating jurisdiction pursuant to Article 34.3.1 as explained by Finlay-Geoghegan J. in Kelly v. National University of Ireland Dublin aka University College Dublin (UCD) [2017] IECA 161:
“The statutory appellate jurisdiction of the High Court is a jurisdiction conferred by statute which is in addition to and is distinct from its originating jurisdiction as a court of first instance pursuant to Art. 34.3.1.” (para. 24)
49. In Re: O’Connor (a debtor) [2015] IEHC 320, [2015] 3 I.R. 434, I considered the role and jurisdiction of the High Court sitting as an appellate court in an appeal under the Acts, and inter alia determined that “the appeal is confined to the grounds already argued in the Circuit Court” (para. 18) save, where exceptional reasons exist as explained by Denham J. in Blehein v. Murphy [2000] 2 IR 231.
50. The High Court in the present case is acting as an appellate court in the determination of a circuit appeal, and its jurisdiction is thereby constrained. It is not exercising its original jurisdiction vested in it by the Constitution. As stated by Finlay-Geoghegan J. in Kelly v. National University of Ireland Dublin aka University College Dublin (UCD) at para 36:
“The appellate jurisdiction is to hear and determine the appeal by a rehearing and is limited to the subject matter of the application to the Circuit Court and the jurisdiction of the Circuit Court in relation to the application.”
51. That, in my view, has the consequence that the High Court exercising its appellate jurisdiction does so within the procedural and substantive confines of the Circuit Court jurisdiction conferred on it by statute. In those circumstances, it seems to be an unavoidable conclusion that the High Court cannot hear and determine an appeal other than one which complies with the statutory procedural rules for the bringing of the decision under appeal. The analysis above outlines these procedural rules.
52. Accordingly, I am of the view that in order to be properly constituted an appeal from a decision of a review by the court must, in accordance with the statutory provisions in s. 115A(1), be an application by a PIP. The jurisdiction exercised on appeal is not a new jurisdiction but rather the court engages of a matter within the jurisdiction of the court of first instance, the procedural and substantive elements whereof are defined by statute, and the parties to which are, and can only be, the same parties as those who litigated and were entitled to litigate before the Circuit Court.
Is the role of the PIP purely procedural?
53. The Debtor argues that once a PIP has performed his or her functions and brought the matter as far as the application for a review under s. 115A, the process may be continued by a debtor, if necessary by appealing a refusal of the Circuit Court for review under s. 115A.
54. It is argued therefore that once the procedural steps have been taken, the procedure is complete and the s. 115A application is properly before the Circuit Court. In those circumstances, it is argued that an appeal is governed solely by s. 37 of the Act of 1936 as amended by the Act of 2013.
55. The Act does not envisage that the PIP will step out of the s. 115A process immediately upon the lodging of the application, and the application is brought, inter alia, grounded on affidavit evidence from the PIP, and sometimes from the debtor. The affidavit of the PIP is a necessary part of the evidence before the court, whether the Circuit Court or the High Court, on appeal or as court of first instance
56. The fact that a PIP performs a role of responsibility and substance, and is required for the purposes of bringing an application under s. 115A to exercise professional judgement, provides to a large extent the backdrop to the procedural requirements and the limitation and directions regarding the manner by which application may be brought. In bringing a professionally qualified person into the heart of the process, the Oireachtas sought to achieve the orderly processing and formulation of a PIA and of an application by way of review to a relevant court. The process is envisaged as being for the benefit of the debtor, but is not one driven by the debtor, nor can he or she engage the process without an intermediary who cannot be said to act merely on instructions, but is required at all times to seek to achieve the resolution of debt, to do so in the exercise of professional judgement, and to engage his or her knowledge or experience in financial matters to fashion a remedy which is satisfactory to all parties concerned. The PIP is an intermediary therefore in a true sense, and neither the creditor nor the debtor can be said to be his or her client.
57. The role of the PIP in the statutory process has already been considered extensively by me in Nugent & Personal Insolvency Actssize=”2″ face=”Verdana”> [2016] IEHC 127. The role is one of substance and responsibility and the PIP does not perform a mere administrative role in formulating a proposal for a PIA or in making application under s. 115A to the court for a review following a meeting of creditors.
58. The PIP does not merely process that application under s. 115A on the instructions of a debtor, but the mandatory statutory forms provide that the PIP must certify that the application is one which he or she considers to be reasonable, and that he or she is satisfied that the statutory tests are met. The legislation envisages the PIP taking a professional and considered view as to the reasonableness of engaging a court application, and envisages a different role for a debtor, the role of instructing the PIP to make such application.
59. The professional indices of the role explain to a large extent why the Oireachtas has chosen to vest in the PIP alone the power to initiate an application under s. 115A of the Act. The limitation on the form of the application thus created is one not unfamiliar in other areas of insolvency law, and one which properly reflects the role of the PIP in the statutory scheme.
60. The role envisaged by the Act in the bringing of an application under s. 115A, and therefore in the appeal of a decision of the Circuit Court under that section, is not incidental nor purely procedural, and while the debtor is the ultimate beneficiary of an order permitting the coming into operation of a PIA, the debtor is not identified in the statute as an appropriate or qualified person either to bring an application under s. 115A or lodge an appeal from a decision under that section.
Legal representation
61. Counsel points to the fact that the Legal Aid Board has granted civil legal aid to the Debtor to make the application under s. 115A and to appeal from the Circuit Court to the High Court. That recognises that many of these applications which raise new and untested questions of law require legal aid and assistance, particularly as creditors are usually represented by solicitor and counsel, and often by senior counsel. The Legal Aid Board is no doubt recognising the unique protection offered to a debtor by s. 115A which inter alia seeks to secure ownership or occupation of a principal private residence of a debtor. That it would grant legal aid in the circumstances is desirable and appropriate.
62. However, the fact that a party or parties is represented, whether before the Circuit Court or the High Court on appeal, by counsel and solicitor does not mean that the application is one in respect to which those parties do not have to meet the gateway requirements.
Argument from the Constitution
63. The Debtor argues in reliance inter alia, on the seminal decision of the Supreme Court in East Donegal Co-operative Livestock Mart Limited & Ors. v. The Attorney General [1970] 1 I.R. 317, that as a creditor has a right to appeal from a decision under s. 115A, a debtor must have such a right and that right of the debtor cannot be constrained by any requirement that the appeal may only be brought with the concurrence of the PIP.
64. That a debtor is an aggrieved person whose interests are impacted or likely to be impacted by the decision of a court whether at first instance or on appeal under s. 115A. does not mean in itself that a debtor may initiate an appeal without observing the statutory and clearly mandatory provisions of the legislation setting out the procedural requirements to commence application under the Act, bearing in mind that the scheme invoked by the debtor is wholly statutory in origin, and in regard to which the Oireachtas has determined that a particular mode of bringing an application is to be followed.
65. The decision of the Supreme Court in Chambers v. An Bord Pleanála & Anor. [1992] 1 I.R. 134. recognises that the access to court is one which is constitutionally guaranteed, but is not authority for the proposition that it may not be lawfully regulated by statute. McCarthy J., with whom the rest of the court agreed, said as follows:
“Section 82 of the Act of 1963 prescribes a time limit for proceedings such as these; obviously, the statutory scheme contemplates challenge in the courts. Access to the courts to contest a justiciable issue is constitutionally guaranteed. It may be regulated as examined in Murphy v. Greene [1990] 2 I.R. 566 where not the locus standi but the right to sue was controlled by the statute.”
The Oireachtas has regulated or controlled the means by which proceedings may be brought by a liquidator or examiner of a company. The Oireachtas has chosen a similar approach in the statutory review provisions in s. 115A from which there is an appeal under statute. Regulation of access to the courts is open to the Oireachtais, and in so regulating the mode of access the Oireachtais has not denied access to the court or prevented a debtor from seeking relief. The procedural requirements of s. 115A do not limit the access of a debtor to the court, but regulate that access. The regulation of the process is one done in the interests not merely as the process, but also it seems to me to limit unnecessary and unmeritorious applications to the court in cases where the application could not possibly succeed.
Decision
66. What the Debtor argues in effect is that the High Court hearing the appeal from the Circuit Court engages a jurisdiction different from that of the Circuit Court, and I reject that contention. The High Court engages precisely the jurisdiction engaged by the Circuit Court, and its power and jurisdiction is an appellate jurisdiction, to determine the correctness or otherwise a decision taken by the Circuit Court. It is as constrained by procedural requirements as was the Circuit Court, and it may hear an application only if it is correctly before it, in the same way and to the same extent as the Circuit Court.
67. An application under s. 115A(1) may be instituted only by a PIP, and a debtor has no statutory standing to initiate the application without the active and substantive engagement of the PIP with the process. The appeal court is constrained by the jurisdictional limitations and cannot engage with the application unless it is brought by the persons who were before the Circuit Court.
68. I am conscious of the practical problem that this conclusion might cause in certain cases. Express provision is made in the legislation for the fees of the PIP in preparing a PIA and calling a meeting of creditors. The legislative scheme is silent as to any costs that a PIP might incur in lodging an application under s. 115A, or an appeal form an order refusing the relief. Many, if not all, of the applications for review to the Circuit Court are conducted by solicitor or solicitor and counsel, and all of the appeals to the High Court, or applications to the High Court in the exercise of its original jurisdiction under the Act, have been to date conducted by solicitor and counsel, and often senior counsel. There is no express provision that the fees and expenses of the PIP, whether in attending court or engaging with solicitor or counsel be met. The PIA makes provision for the fees of a PIP but these fees are already identified in the PIA by the time it comes for consideration by a court.
69. These practical considerations cannot however lead me to construe the statue other than I have done in the course of this judgment.
70. I can envisage circumstances where PIP might be concerned, not so much that he or she would have the fees and expenses for the prosecution of the appeal met, but that he or she might be required to bear the cost of an unsuccessful review or appeal under s. 115A.
71. An award of costs against a PIP has not been made in any application of which I am aware, but the Debtor points to the fact that in Nugent and Personal Insolvency Acts (No. 2) 2016 IEHC 309 I considered that there was “no reason in principle why costs could not be awarded against a PIP in a suitable case”, although I did go on to say that “such jurisdiction would be exercised sparingly and in exceptional circumstances”. If a PIP lodges an application bona fide and in exercise of his or her professional and reasonable judgement, and prosecutes an appeal in a similar fashion, it seems unlikely that a PIP would be subject to an award of costs, and the usual order which has been sought by successful creditors is that an order be made against the debtor, not against the PIP.
72. The awarding of costs against a party is a matter that is within the discretion of the court which will make an order in the light of all the circumstances. The fact that the court may, in exceptional circumstances, award costs against a PIP does not lead me to the conclusion that a PIP ought not to play the statutory role which I consider is envisaged by the Act in the bringing of an appeal from a decision of the Circuit Court under s. 115A of the Act.
73. Accordingly, I am of the view that the preliminary objection raised by the Bank is correct, and that the appeal of the Debtor from the decision of the Circuit Court is not properly constituted and must be dismissed.
74. I will however hear the parties on how the matter may proceed, and whether an order for substitution can or ought to be made at this juncture.
In the matter of Michael Hickey
[2017] IEHC 20
JUDGMENT of Ms. Justice Baker delivered on the 18th day of January, 2017.
1. One matter falls for determination in this judgment, the question of the time limit for the bringing of an application pursuant to s. 115A(9) of the Personal Insolvency Acts 2012 – 2015 (“the Acts”).
2. Section 115A, inserted by the amending legislation of 2015, provides for a court review and approval of the coming into effect of a proposed Personal Insolvency Arrangement (“PIA”) rejected by creditors in certain circumstances, with a view to enabling the debtor not to dispose of an interest in, or cease to occupy, all or part of his or her principal private residence.
3. Michael Hickey (“the debtor”) made a proposal for a PIA under the Acts and a meeting of creditors was held in accordance with the provisions of the Act on 9th September, 2016. He did not obtain the requisite support for the approval of the PIA, albeit Permanent TSB, the mortgagee which held security over his principal private residence, voted for the arrangement. The debtor then sought to invoke the provisions of s. 115A(9) and the sole question for determination in this case is whether the debtor was in time in lodging the application. An objection by KBC was lodged in respect of the application pursuant to s. 115A (3) of the Act on 5th October, 2016 and the question of time was raised as a procedural objection.
4. Certain other matters were raised by way of objection, but it has been agreed that I would determine the procedural objection by way of a preliminary issue.
5. Section 115A(2) of the Act makes provision for the time limit for the bringing of an application to the Court under s. 115A(9):
“(2) An application under this section shall be made not later than 14 days after the creditors’ meeting referred to in subsection (16) (a) or, as the case may be, receipt by the personal insolvency practitioner of the notice of the creditor concerned under section 111A (6) (inserted by section 17 of the Personal Insolvency (Amendment) Act 2015), shall be on notice to the Insolvency Service, each creditor concerned and the debtor. …”
Section 111A does not apply as that section relates only to the approval of a proposed PIA when there is only one creditor.
6. Order 76(A) of the Rules of the Superior Courts provides that an application under s. 115A (9) shall be brought by notice of motion. The motion dated 1st September, 2016 was lodged by e-mail on Friday, 23rd September, 2016, and stamped and lodged in the Central Office of the High Court on 28th September, 2016. For the purposes of the issue to be determined in this application no argument is made that the lodging of the notice of motion by e-mail is sufficient lodgement by “electronic means” in accordance with O. 76(a), r. 4, and it is accepted that neither the personal insolvency practitioner (“PIP”) or the solicitor instructed to act in the prosecution of the application is an authorised “electronic user” within the meaning of r. 4(1) of that Order. I do not therefore intend addressing that issue further.
7. The meeting of creditors was held on 9th September, 2016 and if that day is to be included in the 14 day period prescribed by s. 115A(2) the time limit expired on 22nd September, 2016, a Thursday. If the day of the creditors’ meeting is not to be reckoned time expired on 23rd September, 2016, a Friday.
Section 18(h) of the Interpretation Act 2005 (“The Act of 2005”)
8. Section 18(h) of the Act of 2005 provides as follows:—
“(h) Periods of time. Where a period of time is expressed to begin on or be reckoned from a particular day, that day shall be deemed to be included in the period and, where a period of time is expressed to end on or be reckoned to a particular day, that day shall be deemed to be included in the period;”
9. That section is not materially different from s. 11 of the Interpretation Act, 1937, and the statutory provisions have been considered in a number of cases to which I now turn.
10. In McGuinness v. Armstrong Patents Limited [1980] I.R. 289 McMahon J. was considering the meaning of the provisions of s. 11(2)(b) of the Statute of Limitations 1957 which provided the then relevant period for the bringing of an proceedings for damages for personal injuries. The statutory provision was expressed in the negative and provided that an action shall:—
“…not be brought after the expiration of three years from the date on which the cause of action accrued.”
11. The plenary summons would have been issued within time if the day on which the cause of action accrued was excluded from the computation of the three year period, but McMahon J. held that the date of accrual did come to be included within the statutory time limit in the light of the Act of 1937.
12. That judgment is not dispositive of the question before me as the word “after” appeared in the Statute of Limitations Act and is not a word used in s. 11(2) (b) of the Act of 1957 as indicating or defining a time period which rather is to be seen as identified by the word “from”.
13. The next case in sequence is the judgment of Ellis J. in The State (Hamad) v. North Eastern Health Board [1982] 1 JIC 2001 which called for the interpretation of a provision of the Health (Removal of Officers and Servants) Regulations, 1971 by which was provided for the consideration by the Chief Executive of representations made “before the expiration of seven days after the giving of such notice”.
14. Ellis J. distinguished the judgement of McMahon J. in McGuinness v. Armstrong Patents, and said that the period of time specified in the Interpretation Act is distinguishable in a statute where
“… the period of time is expressed to begin or be reckoned from particular day but is a period of time expressed to begin on or be reckoned from the happening of an event.”
15. Ellis J. considered that the provisions of s. 11(h) of the Act of 1937 offered no assistance to construe or reckon a period of time required to be reckoned from the happening of an event, and that the departure from the language of the Interpretation Act, 1937 was such “as to indicate an intention by the Legislature that the day in which the notice or proposal of intention to remove the Prosecutor was given or served was not deemed to be included in the 7 day period as expressed and defined” in the relevant section of the statutory regime with which he was dealing.
16. Counsel for the debtor relies on the distinction drawn by Ellis J. between the reckoning of time “from a particular day” or “from the happening of an event”.
17. Counsel for the objecting creditor argues that the distinction between “day” and “event” made by Ellis J. has not found support in later authorities, and that insofar as it might lead to a conclusion which differs from these later authorities it is not to be followed.
18. I turn now to consider those later authorities but note by way of a preliminary observation that the judgment of Ellis J. was not referred to in any of those later cases. Two judgments of Hedigan J. are of note. In the first of these, Golden v. Kerry Co. Co. [2011] IEHC 324 Hedigan J. was considering the provisions of s. 17(1) of the Planning and Development Regulations 2001, as amended, which provide for the publication and direction of notices “within the period of 2 weeks before the making of a planning application”. Hedigan J. was asked to consider whether the period of two weeks did include the date the notice was published and the date the application for planning permission was made and held that the date of the planning application was to be included in the calculation of the two week period, and came to that conclusion based on s. 18(h) of the Act of 2005. The statutory provision construed by Hedigan J. did not make any reference to “the date of the making of the application”, and contained the more general phrase “before the making of the application”, which would suggest that he did not consider that the event, the making of the application, could be seen as different from the date of that event.
19. Hedigan J. also gave judgment in Brown v. Kerry Co. Co. [209] IEHC 552, [2011] 3 IR 514. That case concerned the time limit provided by s. 261(a) of the Planning and Development Act 2000 by which a planning authority could impose conditions on the operation of quarry “not later than 2 years from the registration of a quarry” under the statutory scheme created by that Act.
20. Hedigan J. considered that the 2 year time limit prescribed by s. 261(6)(a) did include the date of the registration of the quarry and again drew from s. 18(h) of the Act of 2005 as an interpretative aid. Again no distinction was drawn between the registration of a quarry (an event) and the date of the registration of the quarry (a day or date).
21. That the interpretation of a time limit as mandated by s.18 (h) is in accordance with the plain use of language is evident from the decision of the Supreme Court in Sulaimon v. Minister for Justice Equality & Law Reform [2012] IESC 63. There the Supreme Court considered what it means to “reckon” a period of time from a particular day. In making the reckoning Hardiman J. calculated time by including in his calculation the date of birth of the infant who had sought an order that he was entitled to a certificate of Irish nationality. At p. 16 of the judgment Hardiman J. expressed the view that the statutory provisions coincide with the “ordinary method of reckoning periods of time to and from a particular date, or a date which is ascertainable”. Hardiman J. made no reference to the judgment of Ellis J. in The State (Hamad) v. North Eastern Health Board, but the judgment of the Supreme Court does not adopt an analysis which recognises a distinction between a date and an event, the premise on which the judgment of Ellis J. was grounded.
22. Hogan J. in Re Belohm & Anor. & the Companies (Amendment) Act 1990 [2013] IEHC 157 at para. 43 interpreted the provisions of s. 3(6) of the Act of 1990 by reference to the interpretative tool of s. 18(h) and held that time ran from the day a receiver was appointed to the company, and that that particular day was “included in the computation of the three day period” within which an application to appoint an examiner was to be made.
23. A recent consideration of the question of time is contained in the judgment of Keane J. in McMahon v. Larkin & Anor. [2016] IEHC 483 who held that the 12 month period prescribed under s.149 of the Companies Act, 1990 was to be reckoned to include the day on which the company was wound up.
24. Herbert J. in Boyle v. Higgins [2013] IEHC 31 where he was considering the time limits under s. 150 of the Companies Act, 1990 which provided the time limit for the bringing of an application for a restriction under that Act not earlier than 3 months nor later than 5 months “after the date” on which a report to the ODCE had been delivered. He regarded the word “after” as different from the words denoting time in s. 18(h) of the Act of 2005, and held that when time was to run “after a particular date” no statutory interpretative tool was to be found in that subsection which provided such only when time was to be reckoned “from” a particular date. Herbert J. considered that the relevant rule was found at common law and he was therefore persuaded that the specified day was excluded from the reckoning of time.
25. Herbert J. relied on a judgment of the Court of Appeal for England and Wales in Zoan v. Rouamba 1 W.L.R. 1509 where the Court was dealing with an approach identified as long in existence in the common law, that while legislative provisions dealt with periods of time “beginning with” or “from” a specified day, that day was to be included, the common law held that where an act is to be done days months or years “from or after a specified date” that the period commenced on the day after such specified day. Chadwicke L.J. relied on the judgment of Lord Goddard in Stewart v. Chapman [1951] 2 K.B. 792 that “whatever the expression used” the date from which the period of time was to be reckoned was to be excluded and the criminal statute which required the service of a summons “within 14 days of the commission of the offence”.
26. The Court of Appeal for England and Wales considered that there was “a real difference between a direction that a period of time is to begin with a specified date and a direction that a period is to be reckoned from that date”.
27. The opposite proposition must be the case in Irish law as s. 18(h) is clear that a reckoning either beginning with or reckoned from a particular date was to include that day. The judgment of the court in Zoan v. Rouamba is not an authority by which I am persuaded. Accordingly, the judgment of Herbert J. does not offer any interpretative assistance in the present case, and I express no further view on it. However it is to be noted that Herbert J. did not base his reasoning on any distinction between an event and a date as was found to be relevant by Ellis J. in The State (Hamad) v. North Eastern Health Board.
Discussion
28. The purpose of the interpretative tool contained in s. 18 of the Interpretation Act, 2005 is to create uniformity and clarity in the interpretation of statutes. The long title suggests that its purpose was to guide in the “interpretation and application” of legislation and statutory instruments. Section 13 requires that the Act be “judicially noticed”. I consider that the Oireachtas intended that the interpretative tools relating to the construction of periods of time were intended to govern the interpretation of any and all statutory expressions that related to or provided for the calculation of time. It is not therefore the case that in order for s. 18(h) to govern the interpretation of a time phrase in an Act that the expression “begin on”, “be reckoned from” or “to end on”, “be reckoned to” be the only time clauses governed by the legislation. It would be unsatisfactory if a materially different consequence arose from the use of phrases other than those expressly identified in s. 18(h), and the Act would have failed to perform its objective of providing a sufficient degree of certainty and clarity in the interpretation of statutory provisions. It is of course central to the operation of a statutory time limit that the calculation of that time limit is clear and certain and I do not consider that the Oireachtas intended to limit the scope of time related prepositions to those expressly identified in s. 18(h). This means that prepositions such as “from”, “since”, “beginning on”, “before” etc. would all be read in a manner consistent with the interpretation created by the Act.
29. Fennelly J. recognised the importance of consistency in the interpretation of different time phrases within a particular statute in Walsh v. An Garda Síochána Complaints Board [2010] 1 I.R. 514 where at para. 16 he said “it makes no sense to interpret the two provisions so as to contradict each other.” He made this observation in the context of the question before him whether the Oireachtas intended to produce a different result in regard to two different time limits. Fennelly J. also describes s. 18(h) as a “considered legislative choice”, and also noted the approach in common parlance to the question of time limits and gave the example of an anniversary date as being one which is commonly considered to happen within the year or relevant time frame.
30. The debtor argues that the personal insolvency legislation identifies 17 different time limits in various subsections and that the only subsections that use the word “after” are s. 119A and 115A, all of the other time limits using an expression which counsel says is more readily consistent with the language of s. 18(h), the word “within”.
31. It is argued in those circumstances that this different use within the same statute was intentional and rational primarily because in practice a meeting of creditors will often be lengthy and finish well outside normal business hours. I do not consider that this approach is consisted with the decision of Fennelly J. in Walsh v. An Garda Síochána Complaints Board, which is authoritative on the matter.
32. It is argued also that to reckon the day of the meeting of creditors within the time limit in the Act would fail to recognise the practical factual context in which a meeting of creditors is conducted. I consider that this argument fails to have regard to the requirement of legal certainty in statutory time limits, the precise mischief which was intended to be dealt with by the Interpretation Act, 2005, and earlier enactments. It could not be said that the reckoning of a time period would depend on the time of day when an event happened or concluded.
Conclusion
33. I conclude that the debtor was out of time for the lodging of an application by way of appeal under s. 115A (9) of the Act of 2012. There was no argument advanced that I have a power to enlarge the time for the making of appeal and counsel for the debtor accepts that the law has been authoritatively decided by the Court of Appeal in Law Society of Ireland v. Tobin & Anor. [2016] IECA 26 and that as Finlay Geoghegan J. said giving the judgment of the Court in reference to statutory time limits:—
“Such statutory provisions are true limitation sections in that they expressly or clearly and unambiguously preclude the bringing of an action after the specified period.”
34. The statutory time limit is strict. I consider therefore that the application must fail.
Re: Callaghan, a debtor
[2017] IEHC 332 (22 May 2017)
JUDGMENT of Ms. Justice Baker delivered on the 22nd day of May, 2017.
1. This judgment is given in the appeal of KBC Bank Ireland plc (“KBC”), the objecting creditor, from an order of the specialist judge of the Circuit Court, Judge Mary O’Malley Costello, by which she confirmed the Personal Insolvency Arrangement (“PIA”) of the debtor under s. 115A(9) of the Personal Insolvency Acts 2012 – 2015 (“the Act”) and dismissed the objection of the objecting creditor. This judgment is also given in the appeal of an identical order made by the specialist judge in the interlocking application of Colm Callaghan, Record No. 2016 283 CA.
2. The primary ground of appeal is that the specialist judge of the Circuit Court erred in law and in fact in finding that the proposed PIA was not unfairly prejudicial to the interests of the objecting creditor, and that she erroneously came to the view that the proposed PIA enabled the creditor to recover the debts due to it to the extent that the means of the debtors reasonably permitted.
3. The appeal arises from a submission made by the objecting creditor under s. 98(1) and s. 102(1) of the Act by which the objecting creditor made an alternative proposal to deal with the mortgage debt on the principal private residence of the couple. Other less central grounds of appeal will appear in the course of this judgment.
4. One matter for determination is whether the Act permits the coming into force of a PIA which would involve deferring or “warehousing” the repayment of a portion of secured debt beyond the specified term of the Arrangement.
Relevant facts
5. The debtors are a married couple who reside with their three young children in a three bedroom semi-detached property in Drogheda held by them subject to a mortgage in favour of KBC, the term remaining whereof is 273 months. The secured amount was €285,647 at the date of the issue of the protective certificate on 20th April, 2016. The principal private residence of the couple has a value in accordance with s. 105 of the Act of €105,000.
6. The mortgage debt fell into arrears arising from the fact that both husband and wife were out of work. Mrs. Callaghan was unable to work due to ill health and only in recent months began to receive a weekly invalidity pension. Mr. Callaghan was out of work for approximately sixteen months, but has now obtained employment. In the period when both husband and wife were not working, the mortgage fell into significant arrears and the liabilities of the couple now far exceed their joint monthly incomes.
7. Interlocking PIAs were proposed by the Personal Insolvency Practitioner (“PIP”), Daragh Duffy, the material elements of which I now set out.
Proposed PIA
8. A six-year PIA is proposed. The estimated joint monthly income of the couple for the period of the PIA is €3,025, which after taking into account reasonable living expenses and other costs, leaves available during the currency of the PIA the sum of €474 per month to service mortgage repayments. The amount available will increase at the end of the PIA to €582 for the remainder of the mortgage term. It is proposed that for the period of the PIA the interest rate on the mortgage would be reduced to 2.5% and thereafter would revert to 4.5% for the balance of the term. The short term reduction in the interest rate is proposed in order to provide finance to deal with the unsecured liabilities and pay the fees of the PIP. The mortgage term is to be extended by six years until Mr. Callaghan is aged 70, to January, 2045. There was proposed a debt write-off, called a “negative equity write-off”, of €165,647 leaving a live mortgage balance of €120,000. The amount written down will rank as unsecured and will receive a dividend within the Arrangement. The provision to deal with unsecured creditors is not the focus of this appeal.
9. The statutory meeting of creditors was held on 17th June, 2016, and the PIA was rejected by the majority of creditors present. The secured creditor voted against the proposal.
The section 115A application
10. Following the result of the meeting of creditors, the debtors brought an application pursuant to s. 115A(9) of the Act in the Circuit Court for an order confirming the coming into operation of the PIA notwithstanding that it had been rejected at the meeting of creditors. The statement of grounds in statutory form prepared for the purposes of the s. 115A(9) application stated that the PIA provided a better return for creditors than in bankruptcy and had the consequence that the debtors retained ownership of their principal private residence with a sustainable mortgage.
11. KBC lodged a notice of objection in which it pleaded, in reliance on the statutory provisions, that the proposed PIA would not “enable the creditors to recover the debts due to them to the extent that the means of the debtor reasonably permit” (s. 115A(9)(b)(ii)), that the proposed arrangement was “not fair and equitable in relation to the interests of each class of creditors that has not approved the proposal and whose interests or claims would be impaired” (s. 115A(9)(e)), and was unfairly prejudicial to its interests (s. 115A(9)(f)).
12. A number of affidavits have been filed in the application. The grounding affidavit on behalf of KBC by Garret Gately was sworn on 19th August, 2016. The replying affidavits of each of the debtors were sworn on 20th October, 2016. A supplemental affidavit of Garret Gately was sworn on 7th November, 2016, and the affidavit of Daragh Duffy was sworn on 19th October, 2016. All of this evidence was before the Circuit Court.
A counterproposal or submission by a secured creditor
13. KBC argues that it made a submission for an alternative approach to the secured debt which would have enabled the debtors to continue to reside in their principal private residence, and would have resulted in a better return for KBC in the long term. That proposal was made pursuant to the statutory power contained in s. 98 of the Act by which a PIP is obliged to invite such submissions regarding the debts concerned and the manner in which the debts might be dealt with as part of a PIA. A PIP is obliged under s. 98(1)(b) to consider any submissions made by creditors.
14. Section 98 of the Act permits a secured creditor to make a proposal or a counterproposal for the treatment of its debt. No equivalent provision is found with regard to unsecured liabilities. A PIP is required to have regard to such preferences in formulating a proposal for a PIA. The requirement is not that the PIP should incorporate such express proposals, but s.102(2)(b) mandates that a PIIP have regard to such preferences to the extent that it is reasonable to so do:
(2) In formulating the proposal for a Personal Insolvency Arrangement the personal insolvency practitioner shall—
(a) have regard to subsection (3) and sections 103 to 105, and
(b) to the extent that he or she considers it reasonable to do so, have regard to the preference of the secured creditor furnished under subsection (1) as to the treatment of the security and the secured debt.
15. A PIP therefore may not without some reason ignore such proposals entirely.
16. A submission may form the basis of an assertion by a secured creditor that the proposal in a PIA amounts to an unfair prejudice, and s. 115A(10)(b)(i) requires the court to consider any submission made by a creditor under s. 98(1) or “any alternative option available to the creditor for the recovery of the debt concerned” (s.115A(10)(b)(ii)). Fairness to creditors therefore can be linked to the reasonableness of rejecting some or all of any counterproposals or submissions.
17. A PIP is required under s.102(2) to have regard to the preferred approach of a secured creditor, and s. 102(1) provides that a secured creditor who has been notified by a PIP of the issue of a protective certificate may “indicate a preference as to how, having regard to subsection (3) and subsections 103 to 105, that creditor wishes to have the security and secured debt treated under the Personal Insolvency Arrangement”.
18. The combined effect of the statutory provisions is that a secured creditor has a right to make submissions and the PIP is mandated to consider any such submissions in formulating a PIA. That this is so arises from the nature of the secured debt as a contractual right which is afforded special protection in the legislation by reason of the existence of security. The legislation envisages different treatment for secured and unsecured debts, an approach also found in the bankruptcy legislation and in corporate insolvency.
19. The affidavit of Garret Gately says that he first made a proposal for the alternative treatment of the mortgage debt in a phone call with the PIP on 13th June, 2016, which was rejected in an email later that day. Some dispute exists between the parties as to whether KBC had made its counterproposal on time, but this did not become an issue at the hearing. For the present, I will focus on the terms of the counterproposal and the specific objection by the PIP to the means by which part of the debt was proposed to be warehoused.
The proposal to warehouse
20. The alternative proposal made by KBC to deal with the secured debt was to write off part of the mortgage debt such that it was reduced to €270,000 (a write-down of approximately €15,000) and thereafter for the split of the secured debt into two moieties of €135,000 each. It was proposed that the term of the PIA would be twelve months and that during that twelve month period the active part of the mortgage would be paid at €350 per month, and thereafter for the balance of the existing term at standard variable interest rates. It was the proposal to deal with the inactive part that was rejected by the PIP and has been the focus of the hearing before me.
21. KBC proposed that the amount of €135,000 would be treated as inactive and would be placed in a “warehouse” account carrying 0% interest. The debtors would be given “lifetime tenure” in their principal private residence and the security would not be enforceable until after the survivor of them died. It was accepted in the course of the hearing before me that the KBC proposal would permit the debtors, if their means allowed, to repay some or all of the warehoused amount during their lives, whether during the period of the active mortgage, or thereafter. The particular advantage of the counterproposal identified by KBC was that the debtors would be permitted to occupy their principal private residence for their respective lives, that the mortgage payments in the meantime would be sustainable and affordable by them, but that KBC would still, in time, recover the balance of the loan amount.
22. The specialist judge of the Circuit Court rejected the objection of the secured creditor in an ex tempore judgment, and the only note I have of her reasoning is that she considered that the proposal of KBC was “kicking the can down the road”. It is not clear whether she regarded the proposal as impermissible or that she took the view that the PIA sufficiently dealt with the statutory provisions and did not require reformulation in the light of the contract proposal. I make no criticism of her for this, and the argument engaged in the appeal was longer and the debtors and KBC were each represented by senior and junior counsel.
Warehousing within the statutory scheme
23. The first question for determination is whether the legislation permits of the long term “warehousing” of part of a mortgage debt, or whether the legislative scheme envisages that any amount not immediately repayable would have to be either addressed or reintroduced before the end of an arrangement.
24. The term “warehouse” does not appear in the legislation, but is one familiar to insolvency practitioners, in debt settlement arrangements and in modern banking generally. Warehousing provides for the separation of some or all of a debt in an inactive account for an identified period or until the happening of a specific event. It involves an alteration of agreed contractual repayment terms and the deferral of a portion of a debt to be dealt with later, either on terms to be agreed at the expiry of the inactive term or at the time the deferral itself is agreed.
25. The debtors argue that the counterproposal of KBC involves a type of warehousing not contemplated or permissible in the statutory scheme, and contend that a proposal to warehouse a debt must bring the warehoused or inactive element into account in the currency of a PIA, and that the deferral proposed in the present case is impermissible as going far outside the six-year proposed term of the PIA. The creditor argues that the legislative provisions permit the deferral of a portion of a mortgage debt, as in the present case, until the expiration of the existing agreed mortgage term.
26. My first consideration therefore will be to examine the statutory provisions for the treatment of secured debt and to assess the argument of the debtor that only limited warehousing of secured debt is permissible. Before I deal with the statutory scheme I will briefly note the treatment of warehousing in guidelines issued to lenders by the Central Bank of Ireland on which the debtors place emphasis.
Warehousing generally
27. The debtors point to a number of observations made in the Central Bank Internal Guidelines on sustainable mortgage arrears of 24th September, 2013 and updated on 13th June, 2014 in support of an argument that the personal insolvency legislation does not permit of a deferral or warehousing of part of a mortgage debt outside the term of a PIA. The Central Bank has expressed concern that any splitting of a mortgage debt by which part of the debt is warehoused must not have the effect that a temporary arrangement will leave a mortgage debtor with an unsustainable mortgage once the original contractual repayments are resumed at the conclusion of a period of forbearance. The Central Bank envisages a sustainable split mortgage solution when there is a reasonable prospect of a borrower’s circumstances improving over a longer term. The preferred approach is to prevent short-term warehousing of a loan which might lead to circumstances that when the original contractual repayments are resumed, the mortgage once again becomes unsustainable.
28. Counsel points to a concern expressed in the Central Bank document that:
“Sustainability of a split mortgage will be assessed by the Central Bank, inter alia, with regard to the affordability of the unwarehoused debt payment schedule and to the treatment of the warehoused loan maturity.” (Central Bank Guidelines, p. 9)
29. The Bank has also required lenders:
“Lenders, therefore, need to be able to satisfy themselves – and demonstrate to the Central Bank – that any temporary term arrangement is part of the solution because the borrower would have a sufficiently improved capacity to service the debt at the end of the temporary arrangement.” (Central Bank Guidelines, p. 4)
30. A number of observations are to be made with regard to the Central Bank guidelines. It is obvious that the guidelines are to lenders not borrowers. The Central Bank’s approach requires lenders to engage with the borrowers to such an extent that the individual debt problem of the borrower is dealt with in a sustainable way, and regarded warehousing as a solution when there is a reasonable prospect that a debtor’s circumstances will improve. Sustainability in the medium and identifiable term was regarded by the Central Bank as desirable.
31. Further, the interplay between the Central Bank guidelines to lenders, or indeed the broad approach of the Central Bank or of government to the debt crisis and the specific and real problems caused by mortgage arrears, while it undoubtedly was one of the factors that led to the introduction of the Personal Insolvency Act in 2012, and the amendment by the insertion of s. 115A by the Act of 2015, is not one that may guide my reading of the Act. The starting point for the interpretation of legislation must be the words of the legislation or the purpose of a statute. I turn now to examine the statutory scheme for the making of a PIA.
Making proposal for a Personal Insolvency Arrangement
32. Section 99 of the Act sets out a list of mandatory requirements with regard to matters that must be dealt with in a PIA, and provisions which prohibit certain types of proposals. The maximum duration of a PIA is 72 months, with a provision for an extension of no more than 12 months in certain circumstances. Section 99(2)(e) requires that a PIA should contain proposals that are sustainable and capable of being met by a debtor:
“A Personal Insolvency Arrangement shall not contain any terms which would require the debtor to make payments of such an amount that the debtor would not have sufficient income to maintain a reasonable standard of living for the debtor and his or her dependants;”
33. Section 99(2)(h) provides part of a suite of measures designed to protect the continued ownership or occupation by the debtor of his or her principal private residence:
“A Personal Insolvency Arrangement shall not require that the debtor dispose of his or her interest in the debtor’s principal private residence or to cease to occupy such residence unless the provisions of section 104(3) apply.”
34. Section 115A(9) of the Act was inserted by the Personal Insolvency (Amendment) Act 2015 and created the power in the relevant court to confirm the coming into effect of a PIA notwithstanding that it had been rejected by the creditors at a creditors’ meeting at which a vote was taken on the arrangement.
35. The proposal by KBC that the debtors would have the right to continue to occupy their principal private residence for the respective lives of each of them does protect their continued occupation of the premises, and also indeed their continued ownership, albeit their ownership is proposed to be encumbered with a mortgage that is capable of surviving against their respective estates.
36. In Re J.D. (A Debtor) [2017] IEHC 119, I considered that the provisions of s. 99 did not of themselves envisage that a PIA was required to ensure the continued ownership of a principal private residence, and that the court was entitled to have regard to whether an arrangement could secure the continued occupancy by the debtor of such premises:
“Thus the court will engage its jurisdiction to enable a person to continue to occupy or not dispose of an interest in his or her family home, provided the costs of continued occupation are not excessive or disproportionate. I consider it relevant too, that s. 115A does not have as its focus the continued ownership by a debtor of his or her family home, but rather the continued occupation of that premises, and the section is concerned with enabling a debtor not to dispose of an interest in a property, rather than positively stated as enabling the debtor to continue to own the property. Thus, the perceived public interest in the continued occupation of a premises is not a focus on the acquisition of a capital asset, but rather the preservation of a right to live in a premises” (para. 34)
The statutory treatment of debt
37. Section 100 of the Act contains a list of possible types of provisions that may be incorporated into a proposal for a PIA to deal with payment to creditors, whether secured or unsecured. It is clear from the language of the section that the broad and general examples given in s. 100(2) are not exhaustive and must be treated as permissive:
“The terms of a proposal for a Personal Insolvency Arrangement may include any one or more of the following:
(a) a lump sum payment to creditors, whether provided from the debtor’s own resources or from the resources of other persons;
(b) a payment arrangement with creditors;
(c) an agreement by the debtor to transfer some or all of the debtor’s property to a person (who may be the personal insolvency practitioner) to hold the property in trust for the benefit of the creditors;
(d) a transfer of specified assets of the debtor to creditors generally or to a specified creditor;
(e) a sale of specified assets of the debtor by or under the supervision of the personal insolvency practitioner and the payment of the proceeds of such sale to creditors; or
(f) in respect of secured debts, subject to sections 102 to 105, an arrangement for the treatment of the security and the satisfaction or restructuring of the secured debt.”
38. A PIA, therefore, may include proposals for a “payment arrangement” for the treatment of security and the satisfaction or restructuring of secured debt.
39. There are no limitations in the statutory provisions as to the conditions that may be included in a restructure of a secured debt, and what is envisaged is any agreed alteration to the repayment terms, including, it seems to me, an arrangement by which the term of the mortgage may be extended for many years, including to a time after the death of the debtor. There is in my view nothing in ss. 99 or 100 of the Act which precludes the splitting of the mortgage debt and the warehousing of part of the debt.
Provisions specific to treatment of secured debt
40. Secured debts must be expressly dealt with under a proposed PIA and cannot be dealt with as part of the debts in general. Secured debt is given special statutory protection in a number of respects. Section 102 is of particular relevance and s. 102(6) makes provision for the type of terms which may be included in a PIA to deal with secured debts. It is convenient to set out the entire subsection:
“Without prejudice to the generality of section 100 or subsections (1) to (3) and subject to sections 103 to 105 , a Personal Insolvency Arrangement may include one or more of the following terms in relation to the secured debt:
( a) that the debtor pay interest and only part of the capital amount of the secured debt to the secured creditor for a specified period of time which shall not exceed the duration of the Personal Insolvency Arrangement;
( b) that the debtor make interest-only payments on the secured debt for a specified period of time which shall not exceed the duration of the Personal Insolvency Arrangement;
( c) that the period over which the secured debt was to be paid or the time or times at which the secured debt was to be repaid be extended by a specified period of time;
(d) that the secured debt payments due to be made by the debtor be deferred for a specified period of time which shall not exceed the duration of the Personal Insolvency Arrangement;
( e) that the basis on which the interest rate relating to the secured debt be changed to one that is fixed, variable or at a margin above or below a reference rate;
(f) that the principal sum due on the secured debt be reduced provided that the secured creditor be granted a share in the debtor’s equity in the property the subject of the security;
( g) that the principal sum due on the secured debt be reduced but subject to a condition that where the property the subject of the security is subsequently sold for an amount greater than the value attributed to that property for the purposes of the Personal Insolvency Arrangement, the secured creditor’s security will continue to cover such part of the difference between the attributed value and the amount for which the property is sold as is specified in the terms of the Personal Insolvency Arrangement;
( h) that arrears of payments existing at the inception of the Personal Insolvency Arrangement and payments falling due during a specified period thereafter be added to the principal amount due in respect of the secured debt; and
( i) that the principal sum due in respect of the secured debt be reduced to a specified amount.” (Emphasis added)
41. The list of nine options is expressly made without prejudice to the generality of s. 100 or ss. 102(1) to (3) and subject to ss. 103 to 105.
42. The debtors argue that as a result of s. 102(6)(d) repayment of a secured debt may not be deferred outside the period of the PIA, or as was put by the PIP in his email in response to the KBC proposal, “the proposed warehoused amount would have to be addressed within the arrangement”, or that forbearance of payment of interest and part only of the capital may not outlive the terms of the PIA.
43. The Act permits a broad number of solutions to the treatment of secured debt. If the principal sum due on the secured debt is to be reduced by a proposed PIA, s. 102(6)(g) provides for a claw back if the property is subsequently sold for an amount greater than the value attributed to it in the course of the process.
44. Section 102(11)(a) provides, without prejudice to s. 103, that where a proposed PIA includes terms providing for the reduction of a secured debt, the amount of the reduction is to be treated as an unsecured debt and is to rank equally and in place in equal proportion to other unsecured debt. This particular treatment of the proposed amount to be written off of €166,000 is expressly dealt with in the proposed PIA in the present case.
45. I agree with the argument of KBC that the list contained in s.102(6) is not intended to be exhaustive. The section is permissive and does not mandate the means by which a secured debt may be restructured, and neither s.100 nor s.102(6)(d) preclude a proposal by which a warehoused amount becomes payable after the expiration of the term of a PIA.
46. Further, the provisions of s. 100, especially ss. 100(2)(b) and s. 100(2)(f) permit in general an arrangement for the restructuring of debt, and s. 102(6) is expressly made without prejudice to the generality of that provision. Therefore, the fact that warehousing of the type and for the time proposed is not found in the list of options outlined in s. 102(6)(d) does not mean that the proposal is not permitted by statute.
47. A number of the provisions regarding the treatment of secured debt fortify me in this conclusion, as I outline.
48. Section 102(3) expressly permits the retention by the secured creditor of the security, or that the security be surrendered, and the means by which this may be achieved are not constrained by any statutory provision. Section 99(2)(c) provides that secured debt stands discharged only to the extent provided therein.
49. There is an express requirement in s. 103(2) that a reduction of a secured debt shall not be to an amount less than the value of the property in respect of the security is held.
50. A more concrete protection is afforded by s.103(3) by which the secured creditor is entitled to a claw back on a sale within 20 years, or at the end of the mortgage terms, whichever first occurs, should a sale or disposal achieve a higher figure than that in an agreed s.105 valuation:
“A Personal Insolvency Arangement which includes terms involving —
(a) retention by a secured creditor of the security held by that secured creditor, and
(b) a reduction of the principal sum due in respect of the secured debt due to that secured creditor to a specified amount,
shall, unless the relevant secured creditor agrees otherwise, also include terms providing that any such reduction of the principal sum is subject to the condition that, subject to subsections (4) to (13), where the property the subject of the security is sold or otherwise disposed of for an amount or at a value greater than the value attributed to the security in accordance with section 105, the debtor shall pay to the secured creditor an amount additional to the reduced principal sum calculated in accordance with subsection (4) or such greater amount as is provided for under the terms of the Personal Insolvency Arrangement.”
51. Section 103(11) stipulates the temporal limit to the claw back:
“The obligation to pay an additional amount arising by virtue of this section shall cease—
(a) on the expiry of the period of 20 years commencing on the date on which the Personal Insolvency Arrangement comes into effect, or
(b) on the day on which the debtor is scheduled or permitted to fully discharge the amount secured by the security (or such later date as may be specified for so doing in the Personal Insolvency Arrangement) and does so discharge his or her indebtedness,
whichever first occurs.
52. Protection of this nature over a long period affords a considerable degree of comfort to a secured creditor following the write down of its debt.
Conclusion on warehousing generally
53. I consider that the scheme of the personal insolvency legislation affords a very broad discretion in a PIP to formulate a proposal for a PIA as the financial circumstances of each debtor will be different, and the proposal for a PIA must respect and make provision for such difference and do so in the light of the express objective in the Act that insofar as this can be achieved in a manner that is not unfairly prejudicial to an impaired creditor, a debtor should continue to own or occupy his or her principal private residence.
54. Because of s. 115A, a PIA must deal with any debts secured on the principal private residence of a debtor, and such is required also by virtue of ss. 104 and 99(2)(h) of the Act. A proposal for the restructuring of a debt secured on a principal private residence may be made provided the security over that property is dealt with in such a way that ownership or occupation are protected insofar as this may fairly and reasonably be achieved. The counterproposal made by KBC may not be one that many lenders would be prepared to offer, as the prospect for the recovery of the warehoused amount is pushed far into the future, and the prospect of taking action on the security to a future unknown time, and reasonable banking practices or corporate requirements may not find such proposal attractive. It is not however in itself impermissible.
55. For these reasons I reject the argument of the debtors that the statutory scheme precludes a PIA that makes provision for warehousing part of a debt to be treated outside the period of the PIA. In an individual case, whether a proposal by a creditor for long-term warehousing is one that may reasonably be rejected without risk of being characterised as unfairly prejudicial will depend on all of the circumstances, including whether the proposal provides a better return for creditors than the proposed PIA, or on bankruptcy, and makes provision for the repayment of debt in the light of the means of a debtor.
56. I turn now to consider the circumstances of the present case and the counterproposals of KBC in the light of the statutory tests.
The statutory test:115A(9)
57. Section 115A(9) provides that a court may make an order confirming the coming into effect of a PIA notwithstanding that it had been rejected at a meeting of creditors, but only when it is satisfied that the criteria set out in the section have been met. Section 115A(9)(b) contains an imperative that the means of a debtor be fully brought to bear in a proposed PIA and the court is to be satisfied that:
“The court, following a hearing under this section, may make an order confirming the coming into effect of the proposed Personal Insolvency Arrangement only where it is satisfied that —
…
(b) having regard to all relevant matters, including the terms on which the proposed Arrangement is formulated, there is a reasonable prospect that confirmation of the proposed Arrangement will —
(i) enable the debtor to resolve his or her indebtedness without recourse to bankruptcy,
(ii) enable the creditors to recover the debts due to them to the extent that the means of the debtor reasonably permit, and
(iii) enable the debtor —
(I) not to dispose of an interest in, or
(II) not to cease to occupy,
all or a part of his or her principal private residence.” (Emphasis added)
58. Section 115A(9) is mandatory and the court may make an order only where it is satisfied that the criteria are met. No provision exists, such as is found in the examinership jurisdiction, by which the court may modify a PIA on an application before it, whether under s. 115A or otherwise.
59. Section 115A(9)(b)(ii) constrains a court by considerations of reasonableness, that there be a reasonable prospect that confirmation of a proposed PIA will enable the debtor to resolve his or her indebtedness, and enable the creditors to recover their debts to the extent that the means of the debtor “reasonably permit”. The inclusion of a requirement of reasonableness supports the argument that a margin of appreciation will be afforded to a PIP in formulating a PIA, that the court will not interfere unduly with a proposal even if another and possibly equally reasonable proposal could be formulated, and the objection of a creditor will not be upheld merely on account of the fact that it can offer an alternative proposal. Reasonableness is assessed in the context of the means of the debtor, the likely return to the creditor of a proposal, the likely return on bankruptcy as an alternative, and the reasonableness of the proposed scheme taken as a whole, and in the light of the objective of the legislation that a debtor be facilitated in a return to solvency.
A matter of proportionality
60. A creditor who makes an alternative proposal does not thereby displace a proposal made by a PIP. A creditor may not defeat an application by merely on account of an argument that a better outcome can be achieved by another means.
61. The requirement that the court approach the question by reference to principles of proportionality was identified by me in my judgment in Re Hill and Personal Insolvency Acts [2017] IEHC 18 at para. 37:
“The statutory factors relate to the proportionality of the arrangement, the likely differences between the PIA and an arrangement on bankruptcy, and whether the PIA is fair to all classes of creditors. While the intention of the Oireachtas was to offer a unique and special protection to the principal private residence, that protection did not enable the court to override the vote of a creditor holding security over such property merely on account of the fact that the property was a principal private residence, and other factors resonant of an attempt to achieve a degree of balance of each of them is found in the legislation.”
62. The provisions of s. 115A give the court a broad discretion to offer to a debtor a means by which he or she may continue to own or occupy his or her principal private residence. However, as I said in Re Hill and Personal Insolvency Acts, the mere fact that a property is a principal private residence of a debtor does not enable the court to approve a proposed PIA against the objections of a creditor holding security over that premises, and the court must engage all of the statutory factors which taken together must be seen as indices of how a court is to proportionately balance the respective rights of the parties.
63. Therefore it is not merely on account of the fact that an alternative arrangement is possible that a court will reject an application under s. 115A, or indeed that a court would refuse to approve a proposed PIA following a vote at a meeting of creditors. In balancing the respective rights of the parties, a court must look at any proposed PIA in the context of s. 115A, having regard not just to whether the statutory criteria are met regarding the protection of occupancy or ownership of the principal private residence, but also having regard to a reasonable, coherent and complete argument proposed by an objecting creditor which will achieve a result sufficiently protective of the interests of the debtor.
64. I also note that s. 115A(9)(b)(ii) does not require the court to weight the substance of a counterproposal made by an objecting creditor and the court may engage the exercise envisaged by the Act even in the absence of a counterproposal.
Unfair prejudice
65. An order may not be made if it results in unfair prejudice to a creditor, and while the legislation does not expressly stipulate that the terms of a PIA be fair to a debtor, the provisions of s. 115A by importing a test of reasonableness does require the court to look to questions of fairness or proportionality to all concerned parties. Further, because of s.102(2)(b), a PIP is required to have regard to a stated preference for the treatment of debt only to the extent that the PIP considers “reasonable”. Reasonableness and fairness are broadly equivalent for this purpose.
66. Of particular note in the present case is not merely that the split inactive element of the mortgage is to be warehoused interest-free for 23 years, but that the proposal by KBC is coupled with an offer that the couple may continue to occupy the premises for the balance of their respective lives. The expression used is that the debtors would be given “lifetime tenure” in the house. Because the proposal was never explored, it is not clear if what is intended is a right of residence, or some form of joint life estate. Whatever legal effects are to be contained in the proposal, the protection of the right to reside and occupy the house is sufficiently clear to deal to an extent with the imperative contained in section 115A. But this of itself does not deal fully with the circumstances of the debtors or fairness to the creditors as is required under the Act.
67. I examine now the elements of the proposed PIA which the creditor says are unfairly prejudicial.
The means of a debtor are not brought to account
68. A court must be satisfied taking all matters into account that the proposed PIA enables the creditors to recover the debts due to them to the extent of the means of the debtor. The “means” engaged are present income and capital assets and not the projected means at a time so far into the future that the test is based on hypotheses or conjecture. There may on the other hand be circumstances where future certain or ascertainable means are to be brought into account.
69. KBC argues that the PIA does not enable it to recover its debt to the extent that the means of the debtors reasonably permit. It is argued that a greater return will be achieved in a number of respects under its counterproposal by the long term bringing into account of the capital value of the residence: the write-down would be €15,000, far less that €166,000 proposed in the PIA, and KBC will continue to have the benefit of the warehoused debt, albeit its power to enforce that debt will be constrained by the right of occupancy.
70. The difference in the amount proposed to be written down between the counterproposal of KBC, which involves a write-down of €15,000 only, and that in the proposed PIA of €166,000 or thereabout, is argued to offer a much better return to that creditor, albeit the recovery of half of the debt is stayed without interest for a period of 23 years, and security stayed for the lifetime of the debtor. I am 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. The inactive account that does not bear interest for 23 years, may produce a result, if there is significant inflation in some or all of the period, that the warehoused amount has no real value when payment fall due. I do not consider that a superficial comparison of the financial elements of the proposal is a correct approach, and I have no evidence that supports the argument beyond a mere arithmetic calculation.
71. The principal private residence of the debtor and his wife has on any reckoning a low value and the house is the smallest unit suitable for the reasonable needs of a family. Section 104(2)(d) is relevant, and the premises could not be described as disproportionately costly or unsuitable.
72. The Act requires a proposal to bring to reasonable account the means of a debtor. The proposal to warehouse an amount that at current figures is more than 125% of the value of the dwelling is not proportionate to, or reasonably derived from, that current income and capital assets, or any future ascertainable means. I am 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.
73. At current valuation, the value of the property is less than the amount proposed to be warehoused, but it is impossible at this juncture to know whether the property would increase in value or whether the debtors, on the death of the survivor of them, would have other assets which could meet any shortfall on the debt, should one exist.
74. Further, I do not consider it is appropriate to consider the question raised in the present case on the basis that the estate of the last surviving debtor is likely to be insolvent of the date of the death of the last surviving debtor, particularly having regard to the fact that the debtors of both are in their early forties, and because it is impossible at this juncture to predict how property prices will evolve in their respective lifetimes.
75. In these circumstances I consider that the PIP did not unreasonably fail to adopt the counterproposal, and in my view the means of the debtors have been reasonably and adequately brought to bear on the proposed PIA.
Provision for future solvency
76. KBC relies on my judgment in Re Dunne (A Debtor) [2017] IEHC 59, in which I held that the court was not concerned with the question of whether a PIA would guarantee the solvency of a debtor after the term of an arrangement came to an end. At para. 46, I said the following:
“The mortgage on the principal private residence of the debtor and the interlocking debtor will by agreement with PTSB outlive the PIA by more than 20 years, but that does not in my view mean that the court must be vigilant to ensure that the debtor is reasonably likely to be able to meet the obligations under the mortgage for the balance of the mortgage term. While the court is obliged to enquire as to whether it is reasonably likely that a debtor will meet the terms of the PIA, the court is not required to engage the broader question as to whether the debtor is reasonably likely to be able to perform the obligations as reformulated in the PIA with regard to the repayment of a secured debt over the length of the repayment term.”
77. The PIA in Re Dunne (A Debtor) included a provision for the splitting of a mortgage loan into active and warehoused elements, the warehoused account to be inactive until the expiration of the mortgage term and in regard to which the term of the PIA provided that “options would be explored regarding the payment of the warehoused amount, whether by way of refinancing, making a lump sum payment or sale”. (para. 13)
78. The PIA in that case did involve the splitting of the mortgage into active and inactive elements but both parties accepted that the proposed warehousing outside the term of the PIA was a permissible approach to the secured debt. However, the broad principle enunciated in that case, that the court is not obliged to look to the unknown future and whether a debtor is reasonably likely to be able to perform the obligations as reformulated in a PIA with regard to the payment of the secured debt over a long mortgage term, are relevant. The purpose of the legislation was to afford a breathing space in which a debtor may achieve a return to solvency, not to ensure that such solvency was guaranteed over the entire term of a mortgage, even if the length of that term was identifiable and agreed between borrower and lender.
79. However, the fact that a court will not require that a PIA would guarantee solvency into the future has the corollary that a court will equally not make assumptions regarding the likely financial or other circumstances of a debtor far into the future. In the present case whilst the counterproposal does make provision for the continued occupancy by the debtors of their principal private residence for their respective lives, it is predicated on assumptions and conjecture regarding the living arrangements of the debtors far into the unknown future to a time at the expiration of the mortgage term, when Mr. Callaghan will be 62 years of age and his wife close to that age.
80. In addition I am not satisfied that the reasonableness of the counterproposal is to be tested in the light of an assumption that the couple will wish to remain living in their present home for the rest of their lives, or even for the rest of their working lives. Many life events could mean that they will wish or need to live elsewhere.
81. It is crucial in this context that s. 90 precludes a debtor entering into more than one personal insolvency arrangement in his or her lifetime. This means that the legislation envisages an arrangement which will deal with all present insolvency of the debtors or at least the achieving of solvency within five years. 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. Because a PIA is a once in a lifetime solution it would be wrong to test the reasonableness of a proposal in the light of a preferred solution or counterproposal that could on its terms result in insolvency at a future date. The discussion above with regard to speculative proposals is also relevant in regard to this proposition. A warehousing solution should on present or known figures offer a solution to indebtedness that is likely to be achieved. Neither of the debtors has the benefit of a pension which might provide a lump sum on retirement to deal with the warehoused amount. The repayment of the inactive account therefore is not predicated on any anticipated ability to pay in the future, and is entirely on the hazard. This results in unfairness at a level which I consider material.
Conclusion
82. For all of these reasons, I do not consider that the proposed PIA unfairly prejudices the objecting creditor. The PIP correctly took the view that the counterproposal was not reasonable or fair to the debtors.
83. In those circumstances, I propose affirming the order of the Circuit Court under s.115A of the Act.
JD (a debtor),
Re [2017] IEHC 119
JUDGMENT of Ms. Justice Baker delivered on the 21st day of February, 2017.
1. This judgment is given in an appeal from an order of the Circuit Court personal insolvency judge, Judge Enright, given on 4th November, 2016 where she made an order refusing the application of the debtor under s. 115A of the Personal Insolvency Acts 2012 – 2015 (“the Acts”), and upheld the objection of the secured creditor, EBS Limited (“EBS”).
2. JD (“the debtor”) is a young woman who resides with her two very young children at her principal private residence at a townland in County Wexford, which she holds jointly with her former husband, MR. The couple are co-borrowers and co-mortgagors to EBS in respect of a loan obtained in September, 2007 in the sum of €300,000.
3. The loan fell into arrears in 2013, and I am satisfied that this primarily occurred following a serious illness suffered by Ms. D, and the subsequent breakdown of her marital relationship. The couple separated informally in January, 2012 and Mr. R has failed or refused to make any contribution towards the mortgage repayment since that time.
4. The couple also have unsecured loans, and while these were obtained in the sole name of Ms. D, they were incurred during the marriage and for family purposes.
5. A year or thereabouts after Mr. R left the family home he agreed to make a maintenance payment, but he reduced this voluntary payment on two occasions, in November, 2013 and March, 2014.
6. The mortgage fell into significant arrears and EBS, after engaging with Ms. D and her former husband through the MARP process, and no agreement being achieved, commenced proceedings seeking possession of the dwelling. Through the Money Advice and Budgeting Service (MABS), a short-term arrangement was put in place in 2012/13 that permitted the payment of interest only for a period of time, and by which arrangements were made with the unsecured creditors.
7. Unfortunately for Ms. D, in August, 2014 she engaged the services of a company which held itself out as being an insolvency advice service, Money Bloom, and was assured by them that engagement was being had with her creditors, including the secured creditor, and that an agreement by which the mortgage would be restructured was likely to be agreed. Ms. D engaged fully with that organisation and supplied it with financial statements and personal information.
8. Her affidavit evidence is that she was told that “my mortgage difficulties have come to an end” and that proposals put to EBS had been accepted. This evidence is uncontroverted, as is the evidence that it was not until the mortgage debt had been purchased by a company, Pepper Finance Limited, that she realised that, as she put it “something was not right”. She wrote to Pepper but received no reply, and Pepper ultimately passed the resolution of her debt back to AIB/EBS which then commenced proceedings for repossession by civil bill dated 28th May, 2015.
9. It seems that Money Bloom is not an accredited or regulated insolvency agency and the principal of that entity has a large number of convictions for theft, fraud and forgery.
10. Unfortunately, the engagement that Ms. D had with Money Bloom cost her money and involved her in a loss of time and effort in her attempts to rationally resolve her debt.
11. When Ms. D realised that no arrangement had been made with her mortgage lender, she resumed monthly payments on the mortgage in the sum of €700 per month, less than the agreed amount, but relatively substantial in the context of her earnings.
12. Ms. D made application against her former husband, and a maintenance order in respect of the dependent children was made in the District Court on 27th May, 2014 in the sum of €120 per fortnight, and in December, 2014 after he had ceased making payments she sought and obtained an attachment of earnings order in respect of the maintenance liability.
13. Ms. D sought the assistance of a personal insolvency practitioner (“PIP”), Darragh Duffy, and a protective certificate issued in the Circuit Court on 12th October, 2015. Mr. Duffy presented a Personal Insolvency Arrangement (“PIA”) to a meeting of creditors on 29th January, 2016 which was rejected by the secured creditor, EBS. The relevant details of the PIA are central to the objections made by EBS, and central to the appeal before me.
14. Following the rejection of the PIA at the meeting of creditors, an application was lodged in the Circuit Court for an order under s. 115A of the Acts by which the court has power to approve the coming into effect of a PIA notwithstanding the rejection of the PIA at a meeting of creditors, and the relevant provisions of that legislation will be dealt with in the course of this judgment.
15. The primary focus of the proposed PIA is to procure the retention by Ms. D of her ownership and occupation of her principal private residence. She argues that the proposed PIA gives a better return for creditors than would be achieved in bankruptcy, enables her to retain ownership and occupation of her principal private residence where she resides with her two small children, and that the mortgage repayment arrangements proposed thereunder are capable of being sustained by her in the currency of the Arrangement such as to enable her to return to solvency.
The proposed PIA
16. The provisions of the proposed PIA deal with secured and unsecured debt and provide for a dividend payment to the unsecured creditors and for the splitting of the mortgage into three parts. The secured creditor makes no objection to the splitting arrangement as such, but has sought certain preconditions for the coming into operation of the splitting arrangement, namely the written consent of Mr. R to the proposed treatment of the secured debt, and that evidence be adduced as to his capacity to continue to meet the maintenance payments.
17. Ms. D has unsecured debts to financial institutions of approximately €32,000 and a hire purchase agreement in respect of her motor vehicle in the sum of €17,000 in round figures.
18. The principal private residence of Ms. D has a value, assessed in accordance with s. 105(1) of the Acts, of €190,000. The secured debt at the date of the PIA was €322,227.27, leaving a deficit or negative equity of €132,227.27. It is proposed to write off uncapitalized arrears and a further €80,000, so as to leave a balance of debt of €220,000 split into two parts, a live mortgage balance of €140,000 and a warehoused loan of €80,000. The term of the mortgage is to be extended to 27 years, and to be repayable at variable interest rates.
19. The proposal is for the making of a monthly mortgage payment of €684 to the active live balance for the term of the PIA, 6 years, and a contribution from income in the sum of €338 per month to be applied to the payment of the modest fees of the PIP and by way of a dividend to unsecured creditors. At the end of the PIA it is proposed that the warehoused element of the mortgage would be brought into account and payment of interest and capital on that amount would be made thereafter.
The basis of objection
20. EBS does not object to the splitting of the mortgage, notwithstanding that this will involve a moratorium on payment of the warehoused amount, and the writing off of some of the secured debt. It objects to the PIA on a number of grounds:
a. that the arrangement unfairly prejudices it in a number of respects, primarily because Mr. R’s agreement to the proposed variation of the loan and mortgage contract is not forthcoming;
b. that there are insufficient grounds to be satisfied that the debtor can meet the proposed terms of the PIA, primarily because no evidence has been adduced of the income of Mr. R to enable it to be satisfied that he can continue to meet his obligations as a maintenance debtor;
c. that certain calculations regarding the income of the debtor are incorrect;
d. that the conduct of Ms. D after she fell into arrears with her mortgage showed a degree of financial imprudence, and is conduct that the court is mandated to take into account in the statutory scheme. In the context of the MARP process, in 2014 a more generous offer was made to the couple which was rejected by them, and they have since that time accumulated arrears of more than €40,000 on the secured loan. This is argued to be relevant conduct to which regard is to be had.
The mandatory preconditions in s. 115A(9)
21. Section 115A of the Acts was inserted to give the relevant court power to review a PIA rejected at a meeting of creditors and to approve the Arrangement provided the conditions in the subsection are met. It is accepted that the onus is on the debtor to establish to the satisfaction of the court that the mandatory preconditions in s. 115A (9) are met.
22. The section provides for the making of an order confirming the coming into effect of a PIA if the court is satisfied that there is a reasonable prospect that confirmation of the proposed Arrangement will enable the debtor not to dispose of an interest in or not to cease to occupy all or part of his or her principal private residence. However, the power of the court is not absolute and the jurisdiction of the court may be exercised only if it is satisfied in accordance with the statutory provisions that the proposals are not unfairly prejudicial to the relevant interested parties.
23. Provision is made for the consideration of unfair prejudice in ss. 115A(9)(e) and (f) of the Acts, and the court must be satisfied that:
“(e) the proposed Arrangement is fair and equitable in relation to each class of creditors that has not approved the proposal and whose interests or claims would be impaired by its coming into effect,
(f) the proposed Arrangement is not unfairly prejudicial to the interests of any interested party.”
The preconditions are stated in the negative.
24. EBS argues that there is an underlying unfairness in the PIA having regard to the position of Mr. R as co-borrower and co-mortgagor, and that notwithstanding he is on notice of the making of this application, the fact that he has not engaged with the PIP or with the Circuit Court or this court on appeal means that there is considerable uncertainty as to what approach he might take in the future.
25. That any statutory scheme established with a view of enabling the return to solvency of a natural or corporate person can involve some degree of unfairness to creditors has been noted in the case law relating to examinership, and the mere writing down of debts in the context of an examinership is recognised as an inevitable but not always unfair prejudice. In the leading case of McInerney Homes Limited & Ors. & Companies (Amendment) Act 1990 [2011] IESC 31 O’Donnell J., having noted the lack of specificity in the statutory scheme regarding the nature of what might amount to “unfair prejudice”, made the following statement:
“It might be said that the Act contemplates necessary prejudice to creditors, and only prohibits prejudice which is unfair. However, it may be more correct to conceive of any scheme as being prejudicial since it requires a creditor to accept a lesser amount than is, in theory, his or her legal entitlement. For example in this case the scheme was prejudicial in that it required creditors to accept a written down amount for their debt. But it was said to be unfairly prejudicial because that was less than the banks could obtain on a receivership. The question in any particular case is whether that particular prejudice is “unfair”. The essential flexibility of the test appears deliberate. It is very unlikely that a comprehensive definition of the circumstances of when a proposal would be unfair could be attempted, or indeed would be wise.” (para.29)
26. The same could be said of the scheme provided in personal insolvency, and the Acts require the relevant court to look at the nature of prejudice caused to creditors by the acceptance of a scheme of arrangement, and to consider whether the proposal is “unfairly prejudicial” to the interests of that creditor.
27. There is an express requirement in s. 115A that the court be satisfied that a PIA is not unfairly prejudicial before giving consideration to the exercise of its jurisdiction to approve a PIA notwithstanding its rejection by creditors.
28. Further, in s. 120(e) one of the grounds on which a PIA may be challenged by a creditor is that the PIA unfairly prejudices the interest of that creditor.
29. I accept the argument of counsel for EBS that the test for the court is not to engage the question of the magnitude of the unfairness for which a creditor contends, but rather to consider whether the PIA is unfair having regard to all of the circumstances. The engagement of the court is not simply to be with the figures and calculations, but with the fairness of the proposal having regard to the circumstances of the creditors and the debtor.
30. One factor relevant to the consideration of fairness derives from the statutory context. The exercise engaged by the court in approving a scheme of arrangement in the context of examinership is conducted in the statutory context where the court is, as was described by O’Donnell J. in McInerney Homes Limited & Ors. & Companies (Amendment) Act 1990, “conducting a process in the public interest” and where regard is to be had to the interests, for example, of employees and other creditors.
31. The public interest expressly identified in the long title to the personal insolvency statutory scheme is the public interest in “the rational resolution” by a debtor of his or her debts with a view to that debtor continuing to engage in the economic activity of the State.
32. More concretely, the amending legislation by which was added s. 115A, affords the far-reaching power of the court to approve a PIA notwithstanding its rejection by creditors. The public interest is in is the maintenance of a debtor’s occupation and ownership of a principal private residence. That social and common good is concretely referable to the continued occupation by a debtor of a principal private residence, and the power contained in the section is limited by the fact that only those persons who had a relevant debt secured over his or her principal private residence which was in arrears as defined by s. 115A(18) on 1st January, 2015 could avail of this exceptional remedy. The statutory provision then must be seen as a limited protection of persons whose mortgage payments on their principal private residence fell into arrears at the height of the financial crash. Absent a “relevant debt”, a debtor may not seek to engage the jurisdiction of the court to overrule the result of a creditors’ meeting: see Hill and Personal Insolvency Acts size=”2″ face=”Verdana”> [2017] IEHC 18.
33. Another factor that bears on the considerations of the court is that contained in s. 115A(9)(d), namely that:
“(d) where applicable, having regard to the matters referred to in section 104(2), the costs of enabling the debtor to continue to reside in the debtor’ s principal private residence are not disproportionately large,”
34. Thus the court will engage its jurisdiction to enable a person to continue to occupy or not dispose of an interest in his or her family home, provided the costs of continued occupation are not excessive or disproportionate. I consider it relevant too, that s. 115A does not have as its focus the continued ownership by a debtor of his or her family home, but rather the continued occupation of that premises, and the section is concerned with enabling a debtor not to dispose of an interest in a property, rather than positively stated as enabling the debtor to continue to own the property. Thus, the perceived public interest in the continued occupation of a premises is not a focus on the acquisition of a capital asset, but rather the preservation of a right to live in a premises.
35. I accept the argument of EBS that should the proposed splitting arrangement with regard to the mortgage have the likely effect that it would render the security wholly unenforceable, and render void its claim against Mr. R, whether in debt or on foot of its security, that prejudice would be found, and arguably that prejudice would be unfair.
36. A creditor will frequently negotiate a degree of co-operation with a co-debtor or co-mortgagor who has remained outside the insolvency process, and EBS did seek to engage with Mr. R with regard to the mortgage debt, and the offer of the split mortgage made through the MARP process was an offer to the couple jointly.
37. The scheme of the Acts provides for an application by a single debtor, or by what is termed “an interlocking” debtor, and an interlocking personal insolvency arrangement can be entered into between debtors who are both insolvent.
38. Section 89(3) provides as follows:
“(3) Where two or more debtors are jointly party to all of the debts to be covered by a Personal Insolvency Arrangement and each of those debtors satisfies the eligibility criteria specified in section 91, those debtors may jointly propose a Personal Insolvency Arrangement and, unless otherwise specified, references in this Part to the “debtor” shall be construed as meaning such joint debtors.”
39. It is clear that the Acts do not mandate that joint debtors would make a proposal for an interlocking PIA, and indeed it envisages circumstances where a debtor who has joint debts may make a proposal for a PIA without the co-operation of, or any form of involvement with, the co-debtor. That this is so is apparent from the standard statutory forms submitted to ISI at the initiation of the process, and in which a debtor is obliged to identify joint debts and the name of any co-owners of secured property or co-debtors. Further, only a person who is insolvent may bring application for relief under the scheme of the legislation, and there may be circumstances where a co-debtor is not himself or herself insolvent and therefore would not meet the eligibility criteria.
40. Furthermore, I consider that s. 115A(9)(iii) expressly envisages circumstances where a debtor does not have ownership of the entire interest in his or her principal private residence, and may not be the owner of all of the interest in the property whether subject to a mortgage or otherwise. The subsection is broadly stated as engaging the question of whether the debtor may avoid disposing of an interest and may avoid having to dispose of all or a part of his or her dwelling. (emphasis added)
41. Thus joint debts, whether secured or not, are included within the scheme of the Acts, and a debtor is not precluded from seeking relief under s. 115A on account of the fact he or she does not own the entire of the interest in the principal private residence, and is not the sole mortgagor.
The position of the joint debtor/mortgagor
42. The legislation envisages application for a PIA by a joint debtor without the involvement or co-operation of his or her co-debtor, and this general proposition applies to secured and unsecured loans. EBS argues however, that while it is prepared to agree a split mortgage arrangement, and while the amounts of the write off and the warehoused element are not in dispute, that it can agree to the splitting arrangement only if the co-debtor and co-mortgagor agree to the revised contract. It is accepted by the debtor, that insofar as what is sought to be done is to vary the terms of the security agreement between EBS and the couple, that such a variation is required to be in writing, the contract being one of its nature requiring to be evidenced in writing pursuant to s. 51 of the Land and Conveyancing Law Reform Act, 2009.
43. However, it is not the effectiveness of the variation that concerns EBS, but whether its agreement to vary the repayment terms of the mortgage will impact upon any claim it might make against Mr. R, whether on foot of its security or in debt.
44. The Acts provide some but not a complete answer. Section 116 provides that upon registration in the Register, a PIA shall bind the debtor and, in respect of every specified debt, the creditor concerned. By its statutory nature, then, a PIA does not bind or benefit a debtor not a party thereto. Section 116(3) precludes a secured creditor from taking any steps to enforce its security against the debtor while it is in effect, i.e. while it has been completed in accordance with its terms.
45. Certain provision is made for joint debts in s. 116(6) and (7):
“(6) Nothing in subsections (3) and (4) shall operate to prevent a creditor taking the actions referred to in that subsection as respects a person who has jointly contracted with the debtor or is jointly liable with the debtor to the creditor and that other person may sue or be sued in respect of the contract without joining the debtor.
(7) Subsection (6) does not apply where a Personal Insolvency Arrangement is also in effect as respects the other person,”
46. Section 116(10) preserves the rights of a creditor against a guarantor.
47. EBS argues that s. 116(6) is insufficiently broad in that it relates only to persons who had jointly contracted with the debtor or who is jointly liable to the creditor with that debtor, and does not import any preservation of the rights of a creditor against a debtor who is severally liable.
48. In A.C.C. Bank Plc v. Malocco [2000] 3 IR 191 Laffoy J. was considering the import of s. 17(1) of the Civil Liability Act 1961 which provides as follows:
“17. (1) The release of, or accord with, one concurrent wrongdoer shall discharge the others if such release or accord indicates an intention that the others are to be discharged.”
49. The question before her was whether an accord or settlement reached by the plaintiff bank with the co-debtor of the defendant has the effect, as a matter of law, that the agreement of the bank with the defendant was discharged. Having noted that a “wrong” as defined in s. 2 of the Civil Liability Act 1961 included a breach of contract in the form of non-payment of a debt, she considered that the matter could be dealt with by reference to s. 17 so that as she put it:
“If the settlement agreement indicates an intention that the other is to be discharged, the settlement agreement effectuates his discharge, but, if it does not, he gets the benefit of the settlement agreement and his liability is reduced accordingly.” (p. 201)
50. In that case, it was accepted by the parties that the defendant and his wife were jointly and severally liable on foot of the debt, and Laffoy J. took the view that it was “immaterial whether the debtors are jointly liable or jointly and severally liable for the debt”.
51. As to whether an accord or agreement “indicates”, within the meaning of that word in s. 17, that a co-debtor is intended to be discharged, the court will look at whether “such outcome is agreed expressly or by necessary implication”, and Laffoy J. also held that the onus was on a defendant to establish such intention.
52. I adopt that statement of principle with regard to the effect of an accord, satisfaction or compromise agreement between a debtor and creditor. A PIA is precisely the class of agreement which can be characterised as an accord, satisfaction or compromise, and it is clear from its terms that the proposed mortgage restructure in the present case engages a variation in the repayment terms to be agreed by the debtor.
53. I turn now to consider whether it can be said that the proposed PIA indicates an intention on the part of the secured creditor to forgive the co-debtor.
54. The identified variation in the contractual terms contained at p. 48 of the proposed PIA refers throughout to the amount “the debtor owes” to the creditor concerning the loan. Clause 10 of the PIA, in standard form, provides that upon successful completion of the Arrangement, that the debtor will be discharged from the debts identified and at 10.3 there is an express provision as follows:
“10.3 This Arrangement and the discharge of the Debtor from the Specified Debts upon successful completion of the Arrangement will not affect any rights that the Creditors have in respect of any liabilities owed to them by persons other than the Debtor.
10.4 Clause 10.3 means that any persons who also borrowed money as a joint borrower with the Debtor or who guaranteed the payment of the Debtor’s debts will continue to be liable to their respective Creditors, notwithstanding the approval of this Arrangement.”
55. The protection for the creditor, therefore, is contained within the PIA itself and the express terms thereof, by which it can be readily ascertained that no inference can be drawn, or is intended to be expressed, that the creditor intends by virtue of the agreement with the debtor to discharge any co-debtor. For that reason, and having regard to the approach taken by Laffoy J. in A.C.C. Bank Plc v. Malocco, I consider that it is immaterial whether the debts of the debtor and her former spouse are joint, or joint and several, and the contractual protection expressed in the proposed PIA, and the statutory protection from s. 17 of the Civil Liability Act 1961 combine to afford protection to the creditor with regard to its claim against Mr. R, who is not a party to the restructured arrangement.
56. Similar considerations will arise with regard to the security interests that the Bank enjoys in respect of Mr. R who is a co-mortgagor.
57. I return later in this judgment to the practical effect of the PIA, but on the figures currently available, the principal private residence of the debtor has a value well below the amount owed on the mortgage, and insofar as EBS might seek to recover possession against Mr. R it will undoubtedly be met by an argument that an order for possession has no practical import as Ms. D and her children will continue to reside in the house and may, as a matter of law, continue to do so provided the terms of the restructured mortgage are met.
58. Therefore, it seems to me that the argument of EBS that it is unfairly prejudiced with regard to the enforcement of its security interest in the premises insofar as Mr. R is concerned is not borne out by the law or the facts. The prejudice to EBS will be caused, not by the fact that Mr. R has not been brought into the restructured arrangement, but by the extent of the negative equity, and not by virtue of any unfairness arising from Mr. R’s non-involvement with the process and the fact that he is not contractually bound. Therefore any consideration of the argument of unfairness arising from the revised mortgage falls to be considered on its merits, and whether it unfairly prejudices EBS in itself, and not by reason of the argument regarding the co-mortgagor.
59. I turn now to consider the relevant considerations in the question of unfair prejudice.
Unfair prejudice
60. One factor identified in the course of the hearing as relevant to the question of unfair prejudice is the comparison between the outcome under the proposed PIA and the likely outcome in bankruptcy.
61. That a court is mandated, in the context of the personal insolvency legislation, to have regard to the comparison between the likely return to creditors in bankruptcy, and that available under a PIA, is evident from the objective of the legislation, to provide a means of debt resolution by which a debtor may avoid bankruptcy: see Re Nugent & Personal Insolvency Acts size=”2″ face=”Verdana”> [2016] IEHC 127. The statutory forms require that the PIA should make detailed comparisons between the PIA and the likely return on bankruptcy. Clause 3 of the standard form requires that the PIP identify the details of how it is said the Arrangement would be better for creditors than bankruptcy.
62. That this approach is correct is apparent also from the authorities in examinership, where fairness is to be considered in the context of outcome.
63. Fennelly J. in Re SIAC Construction Limited [2014] IESC 25, [2014] I.L.R.M. 357 considered the concept of unfair prejudice from the point of view of the objector to the scheme of arrangement in examinership, and by way of a comparison to the likely outcome in liquidation. At para. 69 he stated the following:
“69. There are two aspects to the notion of unfairly prejudice. The underlying assumption is that the person in question is, to begin with, prejudiced, that is to say that his interests as a creditor (or, where relevant, a member) are adversely affected or impaired by the proposals. It is the inevitable consequence of the insolvency to a company is that every creditor will, in that sense, suffer prejudice no matter what proposals are put forward. But prejudice is not enough to trigger the court’s obligation to refuse to confirm the proposals. It must in addition be unfair. Unfairness, in turn comprises two essential aspects, the general notion of injustice and the more specific one of unequal treatment.”
64. That the court must look at the proposal in the round is apparent also from the approach of Fennelly J. in that case where he said:
“72. The court will need to assess any claim of a creditor to be unfairly prejudiced by proposals from all angles. There will be a wide range of potentially relevant elements in the factual circumstances of the company, some affecting the creditor adversely and some favourably. As can be seen from the cases, a court will take note of the fact that some creditors, while losing heavily in the write-down of their debts, are likely to benefit if the company is able to resume trading. A party may claim to be prejudiced by the loss of an advantage, right or benefit. On the other hand, it may be relevant to note that the same party is in a position to retain a right or benefit which is not available to other creditors.”
65. This approach is consistent with the approach identified by Clarke J. and approved by the Supreme Court in McInerney Homes Limited & Ors. & Companies (Amendment) Act 1990, that the a court engage a consideration of the appropriateness of the scheme of arrangement against the likely return on a liquidation and that this was “a vital test”:
“30. In this case, the trial judge’s approach to the question was to view the scheme against the likely return to affected creditors under the likely alternative in the event that there was no examinership, and no successful scheme. I agree that that is a vital test.”
66. In the present case the arrangement identifies a number of factors which are said to be more beneficial than the likely result in bankruptcy as follows:
a. The debtor proposes to make contributions of varying amounts over 6 years in final settlement of her unsecured liabilities which will produce a dividend of 9 cent in the euro, and the dividend for unsecured credit on bankruptcy is said to be nil.
b. The payment proposed to be made in respect of the secured loan to EBS provides for payment of the live mortgage and warehoused loan in the total sum of €220,000 to be repayable with interest over the term. On a sale at current value the property would achieve €160,000 in round figures (net of sale costs). The dividend to the secured creditors in bankruptcy is 50 cent in the euro, and under the proposed PIA, 68 cent in the euro.
c. The loss of the principal private residence will have the effect that the debtor’s income will be reduced by the amount of any rental obligation that she occurs in accommodating herself and her children. It seems inevitable should the proposed PIA not be accepted that the EBS will continue with its repossession proceedings.
67. While some difference is apparent between the approach of the PIP and that of EBS with regard to the comparisons with a likely bankruptcy outcome, I do not consider that the evidence of EBS suggests any real dispute, and the comparative figures show a significantly better return for unsecured creditors, and a better return for the secured creditor. The primary argument of EBS is that the PIA prejudices its claim against the co-debtor and co-mortgagor, not that the likely return on bankruptcy is more beneficial to it.
68. The arrangement therefore is more advantageous than the likely outcome in bankruptcy. Accordingly, I consider that the outcome for all the creditors concerned is more beneficial under the PIA than in bankruptcy, and that the comparison with bankruptcy does not suggest any unfair prejudice to any class of creditors.
69. Furthermore, I am mindful of the fact that a court may approve a scheme in circumstances even when a creditor is likely to do worse under the scheme than in bankruptcy, and there is no mandatory condition that the court be satisfied that the return on bankruptcy would be less favourable. The approach of the court in examinership is apposite: see Re Antigen Holdings Limited [2001] 4 I.R. 600, per McCracken J., and the High Court and Supreme Court in McInerney Homes Limited & Ors. & Companies (Amendment) Act 1990:
“Furthermore, as the trial judge recognised, there may well be circumstances where a creditor may be required to accept less than would be obtained in such circumstances on liquidation or a receivership, but those circumstances would normally require weighty justification.”(para. 30)
The scheme of the Act
70. The Act is a considered and nuanced approach to the financial crisis and reflects a legislative choice to offer a less blunt and more flexible approach to the resolution of personal debt than was available heretofore in bankruptcy. Section 115A adds another element to the approach required to be taken by a court and the benefit of a debtor remaining in his or her private residence is a benefit to which regard is expressly to be had. The rational resolution of debt is in the legislative scheme envisaged as permitting the orderly write-down of debt, with the inevitable loss to creditors, both secured and unsecured.
71. In the context of examinership the court is mandated to have regard to considerations of the common good in the preservation of jobs and local economic activity. As O’Donnell J. said in Re McInerney Homes Limited & Ors. & Companies (Amendment) Act 1990, the schemes that can be approved by the court “are those which result in proposals broadly beneficial to all reasonably parties”. What is broadly beneficial in that context is more than merely financial benefit, but also a broader social benefit to the community in the form of continued job activity as explained by Clarke J. in Re Traffic Group Limited [2007] IEHC 445, [2008] 3 I.R 353 at para. 5.5:
“5.5 It is clear that the principal focus of the legislation is to enable, in an appropriate case, an enterprise to continue in existence for the benefit of the economy as a whole and, of equal, or indeed greater, importance to enable as many as possible of the jobs which may be at stake in such enterprise to be maintained for the benefit of the community in which the relevant employment is located. It is important both for the court and, indeed, for examiners, to keep in mind that such is the focus of the legislation. It is not designed to help shareholders whose investment has proved to be unsuccessful. It is to seek to save the enterprise and jobs.”
72. The purpose of the personal insolvency legislation is to enable the resolution of personal debt, and the common good sought to be achieved in s. 115A is the protection of the right to continue to enjoy residence in a person’s home. This focus must be kept in mind when considering the broad benefit of the PIA, and in considerations of whether a prejudice is generally unfair.
73. As I said in Hill and Personal Insolvency Acts size=”2″ face=”Verdana”>, the protection of the principal private residence of a debtor is not an absolute right, and if the mandatory conditions in s. 115A(9) are not met the court may not approve a scheme of arrangement notwithstanding that the result of the arrangement would be the preservation of a person’s occupancy of his or her home. Because I am satisfied that the argument that EBS will lose rights against the co-debtor and co-mortgagor is not correct, and because the return on bankruptcy is less favourable to the objecting creditor, I am satisfied that the mandatory preconditions in s. 115A(9) have been met, and no specific prejudicial unfairness exists in regard to the objecting creditor.
74. As the threshold tests are met in the present case, in the broad context of the scheme as a whole the continued occupation of the principal private residence of the debtor not only achieves a better return than bankruptcy for the secured creditor, but also ensures that the stated purpose of s. 115A is met. The objecting creditor may not elect to object to a proposed PIA under the terms of which it achieves more than in bankruptcy and by such objection avoid the purpose of the section.
75. For these reasons too, the objection under s. 120 by which my discretion is engaged is not made out.
76. Certain other factors are argued as relevant to the discretion of a court in the exercise of its jurisdiction under s.115A and I turn now to deal with these.
The conduct of the debtor
77. Section 120 of the Acts provides for a challenge to a PIA on certain grounds including s. 120(a):
“( a) that the debtor has by his or her conduct within the 2 years prior to the issue of the protective certificate under section 95 arranged his or her financial affairs primarily with a view to being or becoming eligible to apply for a Debt Settlement Arrangement or a Personal Insolvency Arrangement;”
78. EBS argues that the debtor has, by contracting a hire purchase agreement for the purchase of a second-hand car in 2015, arranged her financial affairs with a view to becoming eligible to apply for a PIA. I will leave over to another case where it is directly in issue the question of the correct interpretation of that statutory provision, but in the present case, I consider that the evidence does not point to any financially reckless behaviour on the part of the debtor to which I might have regard. In May, 2015 the debtor contracted to purchase a second-hand motor vehicle for the sum of €17,000 with a hire purchase repayment obligation of €315 per month, which will end in year 5 of the PIA. Her uncontroverted evidence is that she needed a reliable car for the purposes of her employment, and that she entered into the hire purchase agreement at a time when she believed that while EBS had made demand on foot of the mortgage, that an agreement had been made through Money Bloom to resolve the difficulties with the mortgage. That occurred in the context of a full engagement between EBS and the debtors under MARP, albeit that the proposal made by EBS was rejected by both borrowers in 2014, and she could reasonably have believed that a similar split arrangement would be made available to her if she could rearrange her financial affairs to improve her income.
79. I accept that Ms. D rationally approached her finances in the circumstances as she understood them, albeit she had been led astray by her engagement with an unregulated entity. I do not consider that her conduct amounts to a ground of objection.
The sustainability of the arrangement
80. EBS also argues that there is insufficient evidence of the ability of the debtor to meet the proposed PIA. Specifically, the PIA provides for a mortgage payment of €684 per month, which will increase at the expiration of the 6 year term when the warehoused amount is brought into account to €1,104 per month, calculated in each case on the basis of the present variable interest rates. Included in the estimated monthly income figures is child maintenance, and assistance from a family member which has been confirmed in writing as being regular and substantial for the currency of the PIA.
81. EBS argues that there is insufficient evidence that the means of the debtor are sufficient to meet the PIA, primarily because no evidence is available as to the means of the maintenance debtor, and the loss of the maintenance calculated at €519.60 a month (€120 per week, rounded up) would have a significant and prejudicial effect on the ability of Ms. Do to meet the arrangement. It is pointed out that Ms. D fell into arrears in her mortgage payments after her former spouse ceased to pay maintenance, and that there is a risk that this will happen again.
82. In this regard, I cannot ignore the fact that Ms. D has obtained a court order for maintenance and an attachment of earnings order. She has taken all rational steps to secure the payment of maintenance on an ongoing basis. Just as a court cannot engage the viability of a PIA by reference to hypothetical and unknown future events, and just as the court is not required to have regard to whether the PIA will guarantee the return to solvency of a debtor, the test of the sustainability of a PIA is one which must engage the question of reasonableness. The court must be satisfied that the debtor is “reasonably likely to be able to comply with the terms of the” PIA, as provided in s. 115A(9)(c). In ascertaining what is reasonably likely a court must have regard to the extent to which a debt is secured, and security by means of a court order and an attachment of earnings is sufficient security in my view to characterise the payment of child maintenance as being reasonably secure or reasonably certain into the future.
83. In Hill & Personal Insolvency Acts, I rejected the argument of the PIP that his role, and by implication that of the court, was to examine a PIA with a view to ascertaining whether it would guarantee or ensure the continued solvency of a debtor. The same analysis applies to the test of whether the means of a debtor are reasonably likely to be able to meet the PIA. What is reasonably likely to occur is not to be equated with what is certain to occur. The court cannot be expected to engage in hypothetical concerns, or to consider the likely consequence of unfortunate and unexpected events that might have a catastrophic effect on the means either of the debtor, or of any person, including his or her employer or maintenance debtor, on whom the debtor’s income depends in whole or in part.
84. I reject that ground of opposition.
The evidence of income
85. Certain argument was had in the course of the application before me as to the accuracy of the income figures of Ms. D. The PIA proposes that certain voluntary AVC payments and an employer sponsored health plan will be discontinued. This will involve an increase in the income of the debtor. While it is the case that a PIA must set out in an accurate and reliable form the details of the income and expenditure, both present and anticipated, of a debtor, certain assumptions are made by the PIP, namely that the debtor will discontinue the AVC payment and the health plan payment. It is said that these have continued to be paid notwithstanding the application to the Circuit Court and this appeal.
86. I consider it reasonable and proper that Ms. D did not discontinue her AVC and health cover until the PIA was approved by the relevant court, and this is particularly so having regard to the fact that she was relying on the discretionary power of the court to override the result of a creditors’ meeting. The AVC and health plan are of benefit to her financially, and she must know that to discontinue those might involve a financial prejudice which in my view she was reasonable not to engage until it was absolutely necessary.
87. Further argument was made regard to payments being made by Mr. R to deal with Christmas and back-to-school expenses for the children. At most these amount to a €50 per month in two lump sum payments. They are not included in the income figures for the debtor. While I consider that these payments ought to have been included in the calculation of income, I regard the omission as de minimis and indeed the added €50 per month in anticipated income shows a greater likelihood of the PIA being met over its terms.
88. I reject this ground of opposition.
Conclusion
89. I propose making an order that the appeal be allowed and in summary the following are my reasons:
(a) The proposed PIA is not unfairly prejudicial to EBS.
(b) The proposed PIA contains repayment provisions which are reasonably likely to be met by the debtor.
(c) The proposed PIA preserves the entitlement of the debtor to continue to reside with her young children in her principal private residence and does not deprive the secured creditor of any claims against a co-debtor or co-mortgagor.
90. Accordingly, I will exercise my jurisdiction under s. 115A and approve the proposed PIA in respect of this debtor notwithstanding that it was rejected at the meeting of creditors on 29th January, 2016.
Ennis (a debtor),
Re [2017] IEHC 120
JUDGMENT of Ms. Justice Baker delivered on the 27th day of February, 2017.
1. Michael Ennis (“the debtor”) made a proposal for a Personal Insolvency Arrangement (“PIA”) pursuant to the Personal Insolvency Acts 2012 – 2015 (“the Acts”) which was rejected by the sole creditor, EBS Limited (“EBS”) by notice of objection dated 9th June, 2016. EBS holds security over the principal private residence of the debtor.
2. The debtor made application pursuant to s. 115A(9) of the Acts that the Circuit Court would approve the coming into operation of the PIA notwithstanding the objection of EBS.
3. The application under s. 115A was rejected by O’Malley Costello J., of the Circuit Court, on 14th December, 2016, by which she upheld the objection of the creditor.
4. This judgment is given in the appeal by the debtor of the decision of the Circuit Court.
Relevant provisions of the proposed PIA
5. The debtor is a self employed carpenter, and sole owner of his principal private residence situate at Donore, Longwood, Co. Meath, the valuation of which, for the purposes of s. 105 of the Acts is €105,000. The debtor has no other assets save for an old motor vehicle which he uses for the purposes of his trade. The amount due on the loan secured on the principal private residence of the debtor at the date of the preparation of the PIA was €380,276.35, leaving negative equity of €275,276.35.
6. The proposal to deal with the secured debt includes the writing down of a substantial part of the capital and the payment by the debtor of a fixed monthly interest only repayment for the period of the proposed PIA, 72 months, and provision for a repayment on a full interest and capital basis thereafter, at the prevailing variable interest rate. It is proposed that the capital amount owing on the mortgage would be €105,000 and the balance written off at the end of the PIA. Provision is also made for the payment over the six year period of the proposed PIA of an additional payment of €523 per month, to provide additional payment to the secured creditor and the modest fees and expenses of Tara Cheevers, the personal insolvency practitioner (“PIP”).
7. The return to the secured creditor from the proposed PIA will provide a dividend of €42,791, and ongoing payment of capital and interest on the written down mortgage debt. The dividend on a bankruptcy would be much less, €94,500, the net figure following the deduction from the sale price of the costs of realisation.
8. The benefit to the debtor of the exercise by the court of its jurisdiction under s. 115A of the Acts is that it would permit him to retain occupation of his principal private residence where he resides alone, and where his young daughter visits him at weekends.
9. The primary basis of the objection by EBS is that the proposed PIA is unfair and inequitable in circumstances where it has already obtained an order for possession of the principal private residence of the debtor, and where it is asserted that there are no reasonable prospects that the debtor will be reasonably likely to be able to comply with the terms of the proposed PIA.
The secured loans
10. By loan offer made on 5th March, 2004, EBS offered to advance a loan to Mr. Ennis in the sum of €230,000 for the stated purpose of the purchase of a domestic dwelling for his own personal use at the purchase price of €250,000, and subject to the securing of the advance by way of a first charge on the lands to be purchased.
11. A charge was duly put in place on the lands comprised in Folio 23680 of the Register County Meath and EBS is the owner of that charge.
12. A second loan of €80,000 was drawn down by the debtor in six tranches between 25th April, 2007 and 18th February, 2008. A further charge was executed in respect of the second advance and was registered on the folio lands.
13. The payment history of the debtor has been poor for eight years. The debtor argues that his default in payment arose in the context of financial difficulties experienced by him following the collapse in property development and the consequential loss of work opportunities for a person with his skills.
14. EBS made demand on foot of the loan facilities by letter of 10th March, 2014, at which time the amount the arrears stood at almost €80,000. The total amount due and owing on the two loans to include interest at that date was almost €350,000.
15. Proceedings seeking possession were commenced in the Circuit Court, which granted an order for possession on 26th January, 2015, with a stay of six months. At the time the protective certificate was issued to the debtor pursuant to s. 95(2)(a) of the Acts, on 23rd March, 2016, EBS was awaiting execution by the Sherriff of the order for possession.
Unfair prejudice
16. EBS argues that the proposed PIA causes unfair prejudice to it within the meaning of s. 115A(9)(f) of the Acts. The evidence of EBS, contained in the affidavit of Alan Desmond, an agent of EBS, is that as of 12th July, 2016, the amount owing on foot of the two loans was over €380,000. Certain factual propositions are advanced:
(a) The debtor has not shown how he proposes to service the increased repayments which will be due at the end of the six year period of the proposed PIA.
(b) The payment history of the debtor for most of the loan term shows very significant breach of his repayment obligations. No payments at all were made to the main mortgage account from December, 2013 to 28th April, 2016. Capital and interest loan repayments on the top-up or second loan account ceased in August, 2008, only months after it was fully drawn down, and no payments at all have been made on this account since 11th November, 2010.
(c) The principal private residence of the debtor requires significant work for which payment is not catered in the proposed PIA.
(d) No provision is made for increase in maintenance payments currently being made on a voluntary basis in respect of the dependent child of the debtor.
The condition of the principal private residence of the debtor
17. EBS objects to the extent of the proposed write-down in mortgage debt of in excess of 72%, where it argues that no credible basis exists on which the court could take a view that the revised mortgage, after this write-down, is capable of being serviced by the debtor.
18. Section 105 of the Acts requires that an agreed valuation be contained in any proposal for a PIA which includes a secured debt, and that if an agreement cannot be reached between the PIP and a secured creditor as to the estimate of the value, an independent expert be appointed to determine the market value for the purposes of the application.
19. Sections 105(1) to (3) provide as follows:
“(1) Subject to the provisions of this section the value of security in respect of secured debt for the purposes of this Chapter shall be the market value of the security determined by agreement between the personal insolvency practitioner, the debtor and the relevant secured creditor.
(2) Where the personal insolvency practitioner does not accept a secured creditor’s estimate of the value, if any, of the security furnished by the secured creditor under section 102, the debtor, the personal insolvency practitioner and the secured creditor shall in good faith endeavour to agree the market value for the security having regard to any matter relevant to the valuation of security, including the matters specified in subsection (5).
(3) In the absence of agreement as to the value of the security, the personal insolvency practitioner, the debtor and the relevant secured creditor shall appoint an appropriate independent expert to determine the market value for the security having regard to any matter relevant to the valuation of security, including the matters specified in subsection (5).
20. The valuation of the principal private residence of the debtor for the purpose of this section is €105,000. The value was said to be €200,000 in the standard financial statement provided by the debtor on 9th March, 2016, only days before the application for a protective certificate was made in the Circuit Court, and EBS describes the loss of value as “significant and worrying in the extreme”.
21. A valuation prepared by a property adviser and valuer on 28th April, 2016, describes the premises as a “three bedroom detached extended cottage situated on circa one acre site with a garage/storage shed to the rear”. The property is described as being “in need of refurbishment”, and there are no kitchen units or appliances, no oil boiler or oil tank to service the central heating installed in the property, and no running water, as there are no pipes and conduits from the well which is intended to service the premises. The lounge extension and garage/storage shed were constructed or extended without planning permission. There are indications of leaks in the ceiling in the hallway.
22. EBS argues that as a condition of the security agreement entered into with the debtor, the debtor was required to maintain the premises in good repair and condition and not to make any structural alterations to the premises. Clause 6(c) of the mortgage conditions requires the debtor to:
“Put and keep the Property and any additions to it in good repair and condition to the satisfaction of EBS.”
23. Clause 6(g) requires the mortgagor to comply with statutes:
“To observe and comply with the provisions of all statutes and the orders of competent authorities insofar as they affect the Property and generally to do everything concerning the Property which is required by law or regulation.”
24. EBS argues that the current structural and repair condition of the premises suggests a clear breach by the borrower of the terms and conditions in the mortgage, and objects to any “indulgence” of a court when the circumstances point to default by the borrower of the mortgage conditions having led to a devaluation of the premises.
The evidence of the debtor
25. The debtor, in his first affidavit, says that he initially approached Ms. Cheever on or about 4th March, 2016, after what he describes as a “period of extreme pressure, mental health difficulties and on-going failure to reach a resolution with my secured creditor”. He realised that he was facing a very real prospect of losing his home but that he had “buried his head in the sand” regarding his financial difficulties for a number of years.
26. The debtor suffered a sports injury in 2008, in which he shattered his elbow in four places and required two operations. His affidavit evidence is that it took a full year to recover from his injury and that social welfare payments received in the period were sufficient to support his day to day expenditure only, but not to meet any mortgage repayments. He says that he suffered stress, depression and “seizures” as a result. The short medical exhibits suggest the debtor was unable to work for six months, not a year as he states.
27. He now works on a self-employed basis as a subcontractor on a two year contract, the precise commencement date of which was not identified, save that it seems to be in 2016. He expresses himself “confident” that his income will thrive with the improvement in the construction industry generally.
28. The affidavit evidence of Mr. Ennis is that since he first engaged with the PIP, he has been making monthly payments in excess of the agreed payments on his mortgage by way of a “genuine effort on my part to show my bona fides” and that the proposal is sustainable and affordable. His affidavit evidence shows ad hoc, but reasonably regular, payments of €150 or €200 per week in the months of April, May, June and July, 2016.
29. Mr. Ennis says that after the order for possession was served on him in the month of October, 2015, he moved out “temporarily” as he understood that this was required of him. He says that during that time, the premises was broken into and the water pump, oil burner and oil tank were stolen. He accepts that the premises did fall into disrepair but says that the work on the lounge was completed before the mortgage was drawn down, and that it is within planning exemption.
30. The debtor did not adduce any expert evidence as to the planning status of the extension constructed in the dwelling house, but EBS has exhibited an email from an engineer, whose qualifications are not stated, whose opinion is that the extension is not planning permission exempt, and that the “entire property will require retention application” as the development was not constructed in accordance with the original planning permission granted in 1988.
31. The debtor has not contradicted this evidence.
32. The debtor says that he is able to “manage” to live in the house without running water or heat but that he is “currently working on restoring water”. He says that he proposed having some form of functioning heat by winter. He says that from his point of view, the house is perfectly habitable. He is “confident” he can meet the repayment provisions and extra payment provisions in the proposed PIA on the expiration of the six year term.
33. He exhibits a table of projected income prepared by “Bac2 Excellence”, although the precise qualifications of the person who prepared those figures, exhibited in an unsigned and unvouched form, are not disclosed. The projected monthly income figures show a likely profit in the period to 31st December, 2017 of €2,710, allowing for income of €2,695. Additional income included under the heading “miscellaneous others” of €6,500 per annum is not explained. The figures suggest an increase in income, albeit modest, to the end of December, 2018.
The mortgage payments since engagement with the PIP
34. The debtor in a supplemental affidavit sworn on 7th December, 2016, says that whilst from May to August, 2016, he made weekly payments in sum of €200 per week to his mortgage account, he stopped doing this in September, 2016 “in the light of the tone of the affidavit and objection raised by the bank”, but has been saving this sum in his current account. The “mini statement” from Ulster Bank of what is described as a “standard account” does not bear this out, and while it discloses a credit balance, it does not show any history of lodgements of that account. No explanatory narrative is contained in the affidavit.
35. It seems that the premises is now heated by way of a solid fuel stove and electric heaters. Mr. Ennis uses bottled water for drinking and domestic use, and uses his local gym to shower. His evidence is that a water pump will cost in the region of €200 “if same is needed in due course” but that the foul water system is fed from a rainwater tank in the attic.
36. Mr. Ennis also avers on affidavit that he has a friend a plumber who has agreed to carry out the work of putting in central heating at no cost to him.
37. It is unsatisfactory that if Mr. Ennis’ friend is to do such extensive work as installing a central heating system, no explanation is given as to why his friend’s generosity with his time was not availed of by Mr. Ennis to install running water in the premises.
38. Mr. Ennis’ supplemental affidavit, sworn on 7th December, 2016, provides no concrete evidence of his income, but at para. 12 he indicates confidence that there has been a “marked up lift” and that his work is becoming much more predictable and certain as time moves on. It does not exhibit his work contract or explain his income projections. His sole concrete reference to his income is that it is “a steady wage”.
Discussion
39. Section 115A of the Acts, as inserted by the Personal Insolvency (Amendment) Act 2015, gives the court a far reaching power to overrule the result of a vote at a creditors’ meeting if the court is satisfied that a debtor may, as a result of the proposals contained on a PIA, continue to reside in, and/or not be required to dispose of an interest in, his or her principal private residence. The court must be satisfied before engaging its jurisdiction under s. 115A that the proposal is not unfairly prejudicial to the relevant creditor. In the present case, the sole creditor is EBS, which holds security over the principal private residence of the debtor, and which objects to the coming into force of the PIA.
40. I have considered the provisions of s. 115A in a number of judgments, most recently in Re JD (a debtor) delivered on 21st February, 2017 and it is clear that the court, in the exercise of the statutory power, must consider the fairness of the proposed PIA, and in that regard a comparison with bankruptcy is an essential element of the manner in which the court engages the question of fairness.
41. As noted in my judgment in Re JD (a debtor), the protection of the principal private residence of a debtor was a factor identified in s. 104 of the Act of 2012, by which a PIP must insofar as was reasonably practicable, formulate a proposal on terms that would not require a debtor to dispose of an interest in, or cease to occupy his or her principal private residence. The court, however, was required under that section to have regard to the proportionality and reasonableness of such continued occupation or ownership. In particular, s. 104(2) requires that regard be had to certain matters as follows:
“(a) the costs likely to be incurred by the debtor by remaining in occupation of his or her principal private residence (including rent, mortgage loan repayments, insurance payments, owners’ management company service charges and contributions, taxes or other charges relating to ownership or occupation of the property imposed by or under statute, and necessary maintenance in respect of the principal private residence),
(b) the debtor’s income and other financial circumstances as disclosed in the Prescribed Financial Statement,
(c) the ability of other persons residing with the debtor in the principal private residence to contribute to the costs referred to in subsection (2), and
(d) the reasonable living accommodation needs of the debtor and his or her dependants and having regard to those needs the cost of alternative accommodation (including the costs which would necessarily be incurred in obtaining such accommodation).”
42. Section 115A, as inserted by the Act of 2015, gives the court a much broader and far-reaching power to preserve the continued occupation by a debtor of his or her principal private residence. The costs likely to be incurred by a debtor in remaining in occupation of a principal private residence, and the reasonable living accommodation needs of the debtor and his or her dependents are expressly required by ss. 104(2)(a) and (d) of the Act of 2012 to be a factor in the exercise of the jurisdiction under the Acts, and these requirements are repeated in ss. 115A(9)(a) and (d) of the Act of 2015.
43. The debtor now owes a sum in excess of €380,000 in respect of a premises with a value of €105,000. The significant and unusual factor in this case is that the premises is in a relatively poor state of repair in that there is no running water, there is no kitchen and the central heating is not functioning. It is not my function to consider whether the premises is habitable, and in that regard there can be many approaches to the degrees of comforts that might be required by a person in contemporary Ireland. However, the absence of running water, and the fact that the debtor relies on the shower in his local gym and on bottled water to maintain basic living arrangements in his house, is a matter of grave concern to EBS.
44. I too am concerned that the debtor has no reasonable prospect of continuing to reside in the premises in its current condition. Subsection 115A(9)(c) requires that I must have regard to the financial costs of enabling the debtor to continue to reside in his principal private residence, and that these are not disproportionately large. No explanation is given by the debtor as to how he accommodates his young daughter in the house at weekends when there is no running water, or why the generosity of his friend who is a plumber has not been engaged to provide a basic living requirement of running water in the house, or why, if the premises was insured, as is required by the mortgage conditions, the insurance policy has not met the cost of a replacement pump following the robbery.
45. I consider also that the debtor has not adequately, or at all, addressed the fact that the premises is arguably constructed in its entirety in breach of planning permission, and even taking the evidence of the debtor at its height, no answer at all has been given by him with regard to the fact that the garage or outhouse on the lands may have been built wholly without planning permission. No estimate of the cost of dealing with the planning difficulties has been provided by the debtor, and while in his affidavit he confirms that he will “deal with the planning difficulties if the proposal is approved”, he has not provided any means by which I can be confident that he has the means to do so, as he has not addressed the extent of the difficulty or the cost of remedial action.
46. These are significant legal and practical reasons why the costs likely to be incurred by the debtor in remaining in occupation of his principal private residence are relevant and central factors in this application, and I am not satisfied that the debtor has adduced sufficient evidence for me to be satisfied regarding the quantum of such costs, or whether they can be met by him.
47. The factor that weighs most on my mind in considering this application is the singular lack of convincing and concrete detail contained in the application. For this, the PIP does not bear responsibility, and I am satisfied that she was not aware of some of the troubling factors in this case until they were brought to her attention by the affidavit evidence of EBS. I am satisfied that the PIP was not aware that the debtor had ceased to make payments on his mortgage in September, 2016, in the currency of the application before this Court, and while he had the protection of a protective certificate.
48. For these reasons I am not satisfied that the debtor has adduced sufficient evidence to persuade me that the proposals are sustainable. He has provided no narrative to accompany or explain the projected income, or no contract of employment or for services. At best, his evidence is that he is employed as a self-employed subcontractor for a two year term. He describes himself as “confident” of his ability to meet the payments on the mortgage, and the proposed additional payments in the proposed PIA, but he has not adduced sufficient evidence to instil that confidence in me, and in reliance on which I could be satisfied in accordance with s. 115A(9)(c) that he is reasonably likely to be able to comply with the terms of the proposed Arrangement.
49. Another factor weighs also in my considerations. A debtor is required in the context of the protection afforded to him or her by virtue of the granting of a protective certificate to engage with the process in good faith. There is nothing in the personal solvency legislation equivalent to the provisions of s. 85A of the Bankruptcy Act 1988 as amended, by which the court has power to extend the period of a bankruptcy on account of the behaviour of a bankrupt, but the general duties and obligations of the debtor arising under the Acts are set out in some detail in section 118. The relevant s. 118(1) is as follows:
“118.—(1) A debtor who participates in any process under this Chapter is under an obligation to act in good faith, and in his or her dealings with the personal insolvency practitioner concerned to make full disclosure to that practitioner of all of his or her assets, income and liabilities and of all other circumstances that are reasonably likely to have a bearing on the ability of the debtor to make payments to his or her creditors.”
50. Such an obligation is also implicit in any application where a litigant engages the discretion of the court, and arises from the nature of the process which affords a debtor a chance of the resolution of debt by the forgiveness of significant debt due to secured or unsecured creditors, or the variation of the conditions of a loan.
51. Further, the court is required in the context of s. 115A to have regard to the relevant matters contained in s. 115, including ss. 115(9)(b) and (c), and to the grounds of challenge contained in section 120. These factors engage questions of the bona fides of the debtor. Indeed, the debtor himself recognises this and at para. 17 of his first affidavit sworn on 24th August, 2016, he expresses the proposition that he has been making monthly payments in excess of the payments proposed in the PIA since he met Ms. Cheevers, the PIP, “in a genuine effort on my part to show my bona fides”. At the time that affidavit was sworn, Mr. Ennis had ceased making those payments and had commenced making payments into a bank account.
52. Counsel for EBS suggests that the behaviour of the debtor is akin to “holding the process to ransom”, and while I do not propose to adopt that description, I am satisfied that the debtor has not engaged bona fide with the process, nor with the PIP engaged to act as financial intermediary in the process, nor with his legal team.
53. He has made it clear that the decision to cease payments was made unilaterally, and avers at para. 5 of his second affidavit that the payments were stopped without first consulting either the PIP or his legal team. Indeed, it seems that the debtor permitted his affidavit to be presented for the purposes of a notice of appeal lodged on 20th December, 2016, without informing his PIP or his legal advisors of that very significant discrepancy. His lack of candour is material and serious.
54. For those reasons, and in the exercise of my discretion, I propose making an order refusing the appeal and thereby upholding the objection of EBS.
In the matter of Sarah Hill
[2017] IEHC 18
Judgment
Title:
In the matter of Sarah Hill
Neutral Citation:
[2017] IEHC 18
High Court Record Number:
C:IS:SETA:2016:000666
Date of Delivery:
18/01/2017
Court:
High Court
Judgment by:
Baker J.
Status:
Approved
Neutral Citation [2017] IEHC 18
THE HIGH COURT ON CIRCUIT
Record No. C:IS:SETA:2016:000666
SOUTH EASTERN CIRCUIT COUNTY OF TIPPERARY
IN THE MATTER OF PART III, CHAPTER IV OF THE PERSONAL INSOLVENCY ACTS 2012 – 2015
AND IN THE MATTER OF SARAH HILL OF PALMERS HILL, CASHEL, COUNTY TIPPERARY (A DEBTOR)
AND IN THE MATTER OF AN APPLICATION PURSUANT TO S. 115A (9) OF THE PERSONAL INSOLVENCY ACTS 2012 – 2015
JUDGMENT of Ms. Justice Baker delivered on the 18th day of January, 2017.
1. This judgment is given in an appeal by the debtor of an order of the Circuit Court of 19th October, 2016, by which it upheld the objection of Pepper Finance Corporation (Ireland) DAC (“Pepper”) and refused an application by the debtor under s. 115A(9) of the Personal Insolvency Acts 2012 to 2015 (“the Acts”).
2. One net question arises for determination in this appeal, whether the debtor had at the time of the commencement of the process a relevant debt such that the jurisdiction to make an order under s. 115A (9) existed.
3. Ms. Hill made a proposal for a Personal Insolvency Arrangement (“PIA”) which was rejected at the vote taken at a meeting of her creditors on 17th June, 2016, at which all of her creditors holding secured and unsecured debt were present and voted. The total debts of the debtor are €166,643.71, of which €150,976.66 is secured on her principal private residence at Palmers Hill, Cashel, Co. Tipperary. Pepper is the owner of that security and debt.
4. The premises has an estimated value of €55,000, as a consequence of which the debtor was shown to have a significant negative equity. The PIA put to the meeting of creditors provided for the restructuring of the mortgage, the write-off of a substantial part of the debt, the payment on an interest only basis for a period of 6 years and the payment of capital and interest on an annuity basis for the balance of a 25-year term. It was anticipated by the Personal Insolvency Practitioner (“the PIP”) engaged to act on behalf of the debtor that the restructured mortgage would enable the debtor to continue to reside in her home. The proposal also included a provision for the fixing of interest at 5.15% for the full 25-year mortgage term. As is required by the legislation, the proposals to restructure the mortgage repayments and term were made having regard to the current and projected income and reasonable living expenses of the debtor.
5. The other creditor who attended and voted at the meeting, Affinity Credit Union Limited, held an unsecured debt and voted in favour of the proposal.
6. The debtor is employed part-time as a bookkeeper and lives with her daughter in her residence which had been purchased jointly with her former partner, from whom she is now estranged.
Section 115A (9): power of the court to approve an arrangement
7. Section 115A(9) of the Act was inserted by the Personal Insolvency (Amendment) Act 2015 and created the power in the relevant court to confirm the coming into effect of a PIA notwithstanding that it had been rejected by the creditors at a creditors’ meeting at which a vote was taken on the arrangement. The subsection provides as follows:
“(9) The court, following a hearing under this section, may make an order confirming the coming into effect of the proposed Personal Insolvency Arrangement only where it is satisfied that—
(a) the terms of the proposed Arrangement have been formulated in compliance with section 104,
(b) having regard to all relevant matters, including the terms on which the proposed Arrangement is formulated, there is a reasonable prospect that confirmation of the proposed Arrangement will—
(i) enable the debtor to resolve his or her indebtedness without recourse to bankruptcy,
(ii) enable the creditors to recover the debts due to them to the extent that the means of the debtor reasonably permit, and
(iii) enable the debtor—
(I) not to dispose of an interest in, or
(II) not to cease to occupy, all or a part of his or her principal private residence,
(c) having regard to all relevant matters, including the financial circumstances of the debtor and the matters referred to in subsection (10)(a), the debtor is reasonably likely to be able to comply with the terms of the proposed Arrangement,
(d) where applicable, having regard to the matters referred to in section 104(2), the costs of enabling the debtor to continue to reside in the debtor’s principal private residence are not disproportionately large,
(e) the proposed Arrangement is fair and equitable in relation to each class of creditors that has not approved the proposal and whose interests or claims would be impaired by its coming into effect,
(f) the proposed Arrangement is not unfairly prejudicial to the interests of any interested party, and
(g) other than where the proposal is one to which section 111A applies, at least one class of creditors has accepted the proposed Arrangement, by a majority of over 50 per cent of the value of the debts owed to the class.”
8. The statutory provisions were formulated to enable a qualifying applicant to preserve an entitlement to retain ownership, or remain in occupation, of a principal private residence in certain circumstances, and have the effect that a creditor holding security over a principal private residence of a debtor may find that its rejection of a PIA can be overridden by the court. The creditor holding security of that type is treated differently from creditors holding other security, or unsecured creditors.
9. However the court’s power arises only where the debts which are proposed to be dealt with by a PIA include a “relevant debt”. Section 115A(18) defined a relevant debt as:—
“ ‘relevant debt’ means a debt—
(a) the payment for which is secured by security in or over the debtor’s principal private residence, and
(b) in respect of which—
(i) the debtor, on 1 January 2015, was in arrears with his or her payments,
or
(ii) the debtor, having been, before 1 January 2015, in arrears with his or her payments, has entered into an alternative repayment arrangement with the secured creditor concerned.”
10. Section 115A(18)(a) does not give rise to any difficulty and it was the intention of the legislature to enable the court to override the result of a meeting of creditors only when the debtor did have a liability secured on his or her principal private residence. It is in regard to the balance of the definition of a relevant debt that the issue in this case comes to be determined.
11. It is common case that Ms. Hill was not, on 1st January, 2015, in arrears with her payments on the mortgage on her principal private residence. Her counsel argues that she did have a relevant debt, in that she had been in arrears on at least five occasions before 1st January, 2015, and had entered into an alternative repayment arrangement with her bank concerning these arrears.
12. I first set out the events that occurred in 2014 regarding payments by Ms Hill of her mortgage.
The late payments
13. The debtor failed to make the monthly payment on her mortgage on five separate occasions before 1st January, 2015. The relevant circumstances are as follows:
1. The debtor phoned an agent of the Bank on 28th March, 2014, advising she was in financial difficulty and was “struggling to pay her mortgage each month” and asking if there was “anything to help her” including an “interest only arrangement”. The reports of this conversation suggest that the agent of the Bank advised her that as the loan was relatively new, an interest only arrangement would not be advisable as the capital would be left outstanding. It is clear that in that conversation the debtor did ask that one of the alternative repayment arrangements of the type envisaged by the Central Bank Code of Conduct on Mortgage Arrears (“the Code”) would be at least considered by the Bank, but the matter ended there.
2. The borrower made contact with her lender on 8th May, 2014, advising that she was in financial difficulty and the internal bank notes suggest that she was treated as being in “pre-arrears” for the purposes of the Mortgage Arrears Resolution Process (“MARP”) provided in the Code. On 9th May, 2014 an arrangement was made by phone with an agent of the Bank that the payment due could be made by Laser card a few days late. A few days earlier, in the course of a conversation initiated by the Bank the debtor had been asked to fill in a standard financial statement, one step in the resolution process required to be engaged by the lender under MARP.
3. The payment for July, 2014 was not made in the amount or on the date agreed and the borrower contacted an agent of the Bank by telephone and made a “promise” to meet the payment which she did, albeit a few days late, by debit card from a different account.
4. On 12th September, 2014 the direct debit payment from the current account of the debtor was not made by her bank and on 15th September, 2014 the debtor spoke on the telephone to an agent of the lender. From the report or “chat notes” of this conversation it appears that the account was identified as being in arrears but not “in ARA period”, that is that the arrears was not for 31 days. In the course of a conversation on 9th September, 2014 the debtor informed the employee of the Bank that the direct debit for September would not be met but that payment would be made a few days late by way of a Visa debit card. The debtor informed the agent of the Bank that “she was experiencing financial difficulties” as she was not working due to illness and was “unable to support mortgage payments for the future”. The payment was made on 15th September, 2014 and no further action was taken by the Bank.
5. On 14th October, 2014 the direct debit of the debtor was returned unpaid. Later that day Ms. Hill telephoned the Bank and made the required payment which brought her account up to date.
14. Payments in November and December, 2014 and January, 2015 were made on time. The debtor fell into arrears on 10th March, 2015 and payments in February and March had been missed. By letter of 10th April 2015 Pepper advised Ms. Hill that her mortgage loan account was in MARP, as arrears of more than 31 days had accrued.
Relevant debt
15. The legislative scheme was fashioned to offer protection to borrowers in arrears on 1st January, 2015, or who had been in arrears before that time but where the arrears had been dealt with by arrangement with the secured creditor concerned. The legislation does not contain a definition of “alternative repayment arrangement”, nor what it means for a debtor to be in “in arrears with his or her payments”, but only those persons who can show an underlying or persistent inability to pay or an element of insolvency regarding such payments could avail of the scheme.
16. While no definition of an alternative repayment arrangement is found in the Acts some assistance can be taken from the Code issued by the Central Bank of Ireland in 2013. The personal insolvency legislation was made in the broad financial and economic context of the Code. While no direct interpretative link is found between the Code and the Acts, and whilst it is not correct as a matter of law to interpret a statutory provision by reference the Code albeit it has a statutory source, it is helpful to consider the language used by the Code with regard to the resolution of debt on a principal private residence.
17. The Code is directly referenced in Section 91(1) (g) of the Acts requires a debtor to make a declaration in writing that he or she has co-operated for a period of least six months with any creditor holding security over his or her principle private residence in accordance with the “process relating to mortgage arrears or operated by the secured creditors concerned which has been approved or required by the Central Bank of Ireland”, a direct reference to MARP. The PIP must complete a statement or declaration pursuant to s. 54 of the Act that the debtor meets the eligibility criteria contained in s. 91.
18. The Code in turn makes reference to the Acts. MARP is a defined “process relating to mortgage arrears” for the purposes of ss. 52(3) (c), 91(1) (g) and 91(2) of the Act of 2012. “Arrears” arise where a borrower “has not made a full mortgage repayment, or only makes a partial mortgage repayment, in accordance with the original mortgage contract, by the scheduled due date”. The definition includes as arrears a payment not made in full, or was made late even if it was made in full. Ms. Hill was in arrears in that sense, but MARP is not activated until there are arrears of 31 days, which did not happen in her case.
19. The Code does not provide a definition of “alternative payment arrangement” Clause 39, headed “Resolution” requires a lender to “explore all of the options for alternative repayment arrangements” and the clause provides that such arrangements “may include” twelve classes of arrangements including interest only payments on the mortgage for a specified period of time, reducing temporarily or permanently the interest rate, deferring part of a scheduled mortgage repayment for a period, extending the term of the mortgage, adding arrears and interest to the principal amount due, warehousing and changing the type of the mortgage.
20. The phrase is also found in Clause 18 which provides that the MARP framework is to be applied when an “alternative repayment arrangement” breaks down, or has expired.
21. These twelve types of arrangements are not intended to exclusively define the type of arrangement that may be entered into between a lender and a borrower. But, what is clear is that each of them envisages some form of agreement for forbearance, or compromise, or the temporary or permanent alteration of repayment terms and conditions, or which might entitle the borrower to pay late or in a different amount without consequences. MARP is intended to resolve debt to achieve a variation satisfactory to borrower and lender.
22. The word “arrangement” can connote a degree of informality not found in the contractual context, and an arrangement could for example create a mutual understanding by which both parties knew where they stood without complying with formal contractual requirements, such as the Statute of Frauds.
23. The word “arrangement” is found in company and bankruptcy law, for example in the examinership process created by the Companies (Amendment) Act 1990, and such arrangements often have contractual effect only if approved by the court. Indeed the PIA under the Acts is an “arrangement”, and that word rather than “agreement” is used, presumable because the arrangement has force and can impact on the rights of parties only when approved by the creditors and by the court.
24. But in my view, an arrangement is not a mere indulgence on the part of the lender, or a mere acceptance of a breach of the terms of repayment which could be said to give rise, at best, to an estoppel of the type first formulated in Central London Property Trust v. High Trees House Ltd. [1947] KB 130.
An arrangement not within the meaning of the Code?
25. Counsel for the debtor argues that the class of alternative repayment arrangement envisaged as being the likely or desirable result of an engagement with the MARP framework is the not only form of arrangement that gives rise to the ability of a debtor to call in aid the provisions of s. 115A(9). I agree.
26. While some assistance can be found in understanding the meaning of the phrase by reference to the general scheme of the Code, certain differences in emphasis and intention must be noted. The resolution process provided for in MARP can be triggered only when a borrower is in arrears for at least 31 days or where there is an alternative repayment arrangement which has either broken down or expired by effluxation of the time agreed.
27. Some debtors who become insolvent will not be dealt with under MARP which regulates only a bank governed by the Central Bank Act 1942 holding security over the primary residence of a borrower.
28. The scheme of the Code requires that the lender explore the various alternative repayment arrangements with a view to ascertaining whether one or several of them may benefit or be viable in a particular case, and to offer one or several elements of an alternative payment arrangement to the borrower. It is to not determinative of the ways in which a debtor, through a PIP, may engage the resolution processes created by the scheme of the insolvency legislation. Indeed it could be said that MARP offers an alternative to a borrower which could mean that he or she does not need to engage the insolvency scheme.
29. Section 91(1) (g) requires a debtor who applies for a PIA to certify that he or she has engaged with the MARP process relating to the mortgage on his or her principal private residence, and that notwithstanding co-operation has not been able to agree a alternative repayment arrangement, or that the secured creditor is unwilling to enter into such arrangement. Thus the achieving of an alternative repayment arrangement within MARP is not a precondition to the commencement of the personal insolvency process.
30. Some note might be taken of the fact that s. 115A(18) refers to an alternative payment arrangement in the singular, although of itself it does not seem to me that the Oireachtas intended to exclude from the operation of the section a debtor who had entered into a series of arrangements, provided it could be shown that what was entered into or agreed between borrower and lender was an arrangement for an alternative payment of a mortgage debt, either in the amount of capital or interest payable, or by some other scheme or formula.
31. Counsel for the debtor argues that the purpose of protecting the principal private residence of a debtor continued in the Act of 2015 must inform me in my considerations.
The Act of 2015
32. The provisions of s. 115A were intended to allow for a separate treatment of a mortgage debt secured on a principal private residence and to offer particular and unique protection for that property. This is clear also from the provisions of s. 104 of the Act, which required a PIP, insofar as was reasonably practicable and having regard to the financial and other circumstances of the debtor, to formulate a proposal which did not require a debtor to dispose of an interest in, or cease to occupy, all or part of his or her principal private residence.
33. Having regard to the unique protection afforded by the legislation to the principal private residence, one which echoes the constitutional protection of what is there called “a family home”, and having regard also to the long title of the Act of 2012, I consider that a purposive approach to the interpretation of s. 115A(9) is appropriate. The long title of the Act of 2012 identifies the need to ameliorate difficulties experienced by debtors in discharging their indebtedness due to insolvency and identifies in the interests of the common good the need to enable insolvent debtors to resolve their indebtedness in an orderly and rational manner without recourse to bankruptcy.
34. I considered the broad purpose of the legislation in my judgment in Re Nugent & Personal Insolvency Acts size=”2″ face=”Verdana”> [2016] IEHC 127 and, as I noted there, the purpose of the legislation was to further the interests of the common good in the rational resolution of debt and the avoidance of bankruptcy.
35. A specific element of the common good identified expressly in s. 104, is the protection of the principal private residence. Section 115A provides a further mantel of protection to a debtor who may seek the assistance of the court in furthering that protection and s. 115A is in its clear terms formulated in order to offer specific and unique protection to the continued occupation of the principal private residence by a debtor who satisfies the statutory tests.
36. The discretion of the court engaged by s. 115A (9) requires that the Court be satisfied that the proposed PIA enables a creditor to recover debts due to them to the extent that the means of the debtor reasonably provide, and that the proposal will enable the debtor not to dispose of an interest in, or not to cease to occupy, his or her principal private residence, and that the costs of enabling the debtor to continue to reside in that premises are not disproportionately large. The court must be satisfied that the proposed arrangement is “fair and equitable” in relation to each class of creditors that has not approved the proposal and whose interests or claims would be impaired by its coming into effect. The Court is also required under 115A (10) to consider the conduct of the debtor in the previous two years in seeking to pay the debts concerned.
37. Section 115A is not intended to give a broad unfettered discretion to the court to protect a principal private residence, and to do so could lead to an undesirable lack of certainty in financial arrangements, and to a lack of a proportionate approach to the interests of the debtor and creditor regarding such loans. Thus the court’s sympathy for a person who is likely to lose a principal private residence if a PIA is not accepted by the creditors is not a factor that may be taken into account. The statutory factors relate to the proportionality of the arrangement, the likely differences between the PIA and an arrangement on bankruptcy, and whether the PIA is fair to all classes of creditors. While the intention of the Oireachtas was to offer a unique and special protection to the principal private residence, that protection did not enable the court to override the vote of a creditor holding security over such property merely on account of the fact that the property was a principal private residence, and other factors resonant of an attempt to achieve a degree of balance of each of them is found in the legislation.
38. The legislation envisages the court examining not merely the prospective likely performance by the debtor of the terms of the PIA, but also whether the debtor has acted reasonably with regard to his or her debts and presumably not irrationally or carelessly found himself or herself in a situation where an insolvency arrangement is a last minute or emerging solution to a ongoing problem. It does not in my view envisage that a debtor will readily persuade the Court that a PIA is “fair and equitable” and that his or her conduct has been appropriate if he or she ignores all correspondence from the bank and ignores a gathering storm of indebtedness.
39. The court’s discretion is constrained by the statutory factors and s. 115A (9) is not intended to benefit those debtors where insolvency is likely to lead to personal hardship. Personal hardship or the hardship that might be experienced by a family is not an individual factor identified in the Act.
40. Ms. Hill most certainly has shown diligence in meeting her mortgage payments, and made effort on each of the five occasions when she encountered financial difficulties to meet her payments by another means, albeit in each case she was a few days late. The lender, equally, cannot be said to have failed to respect her diligence and good faith, and on each occasion accepted late payment, as a forbearance or tolerance.
41. There was not however, in my view, an alternative payment arrangement entered into between Ms. Hill and the Bank such as to bring her within the type of arrangement envisaged as the gateway or precondition to the making of an application under s. 115A. The words of s. 115A (18) (b) (ii) are expressed in such a way as suggests that the Oireachtas required that there be more than a series of ad hoc or one-off acceptance of breach, but that there be an arrangement as a result of which some alternative terms and conditions as to the repayment of a secured loan were agreed to govern the repayment obligations of the borrower.
42. Having regard to what I consider to be one principle that guides the legislation, the requirement that the court would look at the balancing of interest between creditor and debtor, and also having regard to the fact that what in my view the legislation intended was that the parties agree an alternative arrangement whether on a temporary or permanent basis, I consider that what the Oireachtas had in mind in fixing the threshold requirement for an application under s. 115A(9) was that a debtor not merely be treated by its lender as falling within the MARP framework but to have actually entered into an arrangement by which the provisions for the repayment of a mortgage were re-negotiated and agreed in a way that met he needs of both parties.
Did Ms. Hill have an alternative repayment arrangement?
43. The debtor made a late payment in May, 2014, June, 2014, July, 2014, September, 2014 and October, 2014. On each of those five dates the payment was made from an account other than the account from which the direct debit mandate was agreed to be made. On each occasion the debtor was in contact with the “Arrears Support Unit” of the Bank, and on each occasion the debtor stated that she was in financial difficulty, and sought the indulgence of her lender. On no occasion did the period of arrears meet the 31 day threshold provided in the Code, and this fact was noted on the internal Bank records of the phone conversations. On each occasion also, a letter was sent to the debtor advising her that she was regarded by the bank as being in arrears or “pre-arrears” and that the bank was thenceforth intending to deal with the mortgage under the MARP framework. The debtor was asked to complete a standard financial statement and a copy of the MARP information booklet was sent.
44. In each case the lender sent a letter for the purposes of clause 9 of the Code which requires a lender to communicate promptly and clearly with the borrower to establish why the mortgage payment agreement had not be adhered to.
45. It is clear however that in each of the five occasions when the mortgage payments were made late, and by a different method from that provided in the contractual arrangement between borrower and lender, that no arrangement was made by which the contractual terms and conditions of the mortgage were varied by agreement, save in regard to the individual payment in question. There was, for example, no agreement that the amount of the payment be reduced, that the debtor be entitled to make payments on an interest only basis for an identified period, or that there be a moratorium on full payments for a time.
46. The late payments and the phone contact had between the debtor and the agent for the lender show that the debtor was in financial difficulties through 2014 and was having a particular difficulty in meeting her mortgage payments on five consecutive months. The lender regarded the conversations with the borrower to be an indication that the borrower was in “pre-arrears”, a specific category identified in the MARP framework, and that the reason for late payment was not inadvertence or some other factor which did not denote a difficulty arising from an inability to meet the payment.
47. That Ms. Hill did not on any one of the five occasions make an arrangement on which she could rely and by which she was entitled without being in breach to vary the repayment dates or manner of payment, is clear from the fact that on each of the occasions when she fell into arrears she made contact with the Bank or, in the case where the Bank contacted her, she spoke openly to the agent of the Bank, and sought the indulgence or forbearance of the Bank in regard to the repayment. She did achieve that forbearance or indulgence
48. I am not satisfied therefore that the ad hoc acceptance of breach could be called an alternative arrangement, and Ms. Hill did not reach an arrangement for amended terms and conditions of repayment.
49. The Oireachtas chose to fix a particular means by which it would afford protection to debtors with distressed mortgages, and presumably to prevent strategic defaulters taking advantage of the revised scheme implemented by the amending legislation in 2015, the Oireachtas envisaged a cut-off of 1st January, 2015, a date considered, by economists at least, by which the worst of the financial crisis and historic mortgage debt crisis were over, or has stabilized.
50. The court under the legislation does not have power to override the result of a meeting of creditors in circumstances where the distressed debt secured against a principal private residence was not shown to be distressed in one of the two ways identified by the Oireachtas by s. 115A(18), and Ms. Hill, while she undoubtedly had difficulty in making her mortgage payments, and undoubtedly was identified by her lender as being likely to continue to have such difficulties, did not have an arrangement which the Act applied on the operative date of 1st January, 2015.
51. The result is harsh for Ms. Hill. She has made every effort, and been diligent in seeking to meet her repayments. Her mortgage debt is relatively small and she is hopeful that her income will improve and as she has shown, it has improved in the recent past. But Ms. Hill may not seek that I would exercise my discretion under the amending provisions on account of the sympathy which I do have for her, and which in all the circumstances arose from matters over which she had insufficient personal control.
52. Because of the cut-off point of 1st January, 2015, Ms. Hill found herself, as a result of proactively engaging with her lender and making payments by alternative means and a few days late on five separate times in the calendar year 2014 in a position whereby she was not in arrears on that date.
Decision
53. In the circumstances, I consider that the provisions of s. 115A (9) are not engaged in this application, and that Ms. Hill did not have a relevant debt in respect of which a PIA could be approved by the Court.
Re Hayes, a debtor
[2017] IEHC 657
JUDGMENT of Ms. Justice Baker delivered on the 1st day of November, 2017.
1. This judgment is given in the appeal of a determination of the Circuit Court of 6th February, 2017 and in the appeal of the spouse of the applicant, James Hayes [2017 No. 39 CA], an interlocking debtor.
2. Mitchell O’Brien, the personal insolvency practitioner (“PIP”), formulated interlocking Personal Insolvency Arrangements (“PIAs”) on behalf of the debtors which were rejected by their respective creditors at a statutory meeting on 5th August, 2016.
3. Application was then made to the Circuit Court under s. 115A(9) of the Personal Insolvency Acts 2012 – 2015 (“the Act”) that the court would confirm the coming into operation of the interlocking PIAs notwithstanding their rejection at the meeting of creditors.
4. By order of Her Honour Judge Enright, Judge of the Circuit Court, made on 6th February, 2017, the objection of Shoreline Residential DAC (“Shoreline”), the objecting creditor was upheld.
5. The debtors have appealed that decision.
6. Shoreline holds security on the principal private residence of the debtors having purchased a portfolio of mortgage loans from Irish Bank Resolution Corporation Limited from the special liquidators. Shoreline is an investment fund and is not a regulated entity, but has appointed a regulated entity, Pepper Asset Servicing, to undertake credit servicing. Shoreline objects to the PIA on the grounds that the Arrangement is unsustainable, would not return the debtors to solvency and is unfairly prejudicial to its interests as it proposes an extension of credit to the debtors on terms it argues depart radically from those generally available to borrowers from lenders in the Irish market.
7. Two primary matters arise for consideration in this judgment, the proposed extension of the mortgage term, from the current remaining term of eighteen years and two months, to twenty-seven years, when Mr. Hayes will be 79 and is likely to have retired from his employment, and the proposal to fix interest for the entire of the term at a rate of 3.65%.
8. The debtors argue that the return to creditors from the proposed PIAs is greater than the likely return on bankruptcy, that the maximum means of the debtors have been brought to bear on the repayment of debt, and that there is no unfair prejudice to Shoreline arising from the proposals.
Income and liabilities
9. The market value of the principal private residence of the debtors is €190,000, determined in accordance with the provisions of s. 105 of the Act, and the amount owed on foot of the secured loan is €323,626.21. The remaining term on the mortgage on the principal private residence is 218 months (eighteen years and two months). The principal private residence is a modest family home and no argument is made that it is not suitable for the needs of the couple and their children. The debtors have dependent children aged respectively eight and eleven years.
10. Jacqueline Hayes is employed full time in a permanent position and her monthly income after tax is €1,488. James Hayes in employed part-time and his monthly income, supplemented with social welfare payments, is €1,625.
11. The joint income of the couple is €3,112.65 per month and the set costs taking into account the Reasonable Living Expenses (“RLE”) Guidelines (July, 2016 ed.) issued by the Insolvency Service of Ireland (“ISI”) are €1,835.74 per month. The PIA provides for a mortgage repayment of €1,080.58 per month. The mortgage protection insurance is to continue at €106.48 per month. The monthly outgoings of €3,022.80 per month leave therefore a surplus of €89.85 per month. The PIP asserts that the mortgage payment of €1,080.58 is sustainable on the current income of the debtors.
12. The PIP has presented the interlocking PIAs by pooling the income of the couple and presenting the figures in the PIA as notional figures to reflect this. There is no requirement in the legislation that mandates this approach by the PIP, but having regard to the fact that a PIP has a margin of appreciation in the way in which he presents the financial information, and in the way in which the income and outgoings are structured in a proposed PIA, I am satisfied that the total available income is correctly stated at €3,112.65 (at p. 40 of the PIA) and that the means by which the payments are to be met on the restructuring are adequately reflected in the income and expenses schedule (at p. 39 of the PIA). The PIA was structured to take account of the fact that Mr. Hayes has a greater proportion of the debt and the repayment provision is accordingly presented at a ratio of 52:48, with the smaller proportion being allocated to Mrs. Hayes.
13. The total unsecured debt is €33,529.66, and the class of unsecured creditors voted in favour of the proposals.
The proposed PIA
14. The proposed PIAs deal with the secured and unsecured debt and provide for a small dividend payment to the unsecured creditors.
15. There are two secured creditors, Shoreline, with a debt of €323, 626.21 and First Citizen which holds a judgment mortgage in the amount of €14,071.36 against the debtors’ interest in their principal residence. The PIA proposes the write-down of the Shoreline mortgage balance to €190,000, the current value of the principal private residence. The PIA proposes that the First Citizen secured debt will rank as unsecured debt and that First Citizen will release its judgment mortgage on successful completion of the PIA.
16. The PIA proposes to extend the term of the mortgage to 27 years from the coming into effect of the PIA, or 21 years from its completion. It is proposed that during the currency of the PIA interest only payments would be made on the mortgage and thereafter the interest rate would remain fixed at 3.65% over the remaining term of the mortgage.
Are the interlocking PIAs sustainable?
17. Section 115A(9)(b)(i) provides that a court may confirm a PIA under the section only where it is satisfied that there is a reasonable prospect that confirmation of the PIA will enable a debtor to resolve his or her indebtedness without recourse to bankruptcy. This is a statutory formulation requiring that the court be satisfied that a proposed Arrangement is capable of being maintained by the debtor, and finds an echo in s. 115A(9)(c), that the court be satisfied that a debtor is reasonably likely to be able to comply with the terms of a proposed Arrangement.
18. The objecting creditor argues that the proposed arrangements are unsustainable in a number of respects. It is argued that the debtors do not have the income to meet the capital and interest repayments on the restructured mortgage after the expiration of the 72-month period of the PIA. Second, the proposal to extend the mortgage terms to 27 years will require mortgage payments to continue until Mr. Hayes is 79 years of age, and his wife is 68 years of age. In those circumstances, it is argued that the information now available points to the unavoidable conclusion that the arrangements are unsustainable.
19. The PIP in formulating a PIA is given what I described as a “margin of appreciation” in Re Callaghan (a debtor) [2017] IEHC 325 at para. 59. However, notwithstanding that a PIA may be formulated in many ways, and that a PIP may take a different approach to broadly similar financial circumstances, a proposed PIA must be shown to be reasonably sustainable during its currency. The language used in the Act is that it be shown that the debtor is “reasonably likely” to meet the terms of the PIA: s115A(9)(c).
20. While the legislation requires that the court be satisfied that the PIA is reasonably likely to be performed, I do not consider that it was envisaged that a PIA would merely act to suspend an inevitable bankruptcy, as the scheme of the Act is to enable restoration of a debtor to solvency without recourse to bankruptcy, so that, as recited in the preamble, the debtor will return to engage in economic activity in the State:
“(c) 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,”
21. The purpose of the legislation is to facilitate the return to solvency of a debtor, and to do so in a reasonable way, so that the new-found solvency is itself sustainable. It is in that context that the legislation has permitted the writing down of secured and unsecured debt, so that at the end of the six-year period of a PIA the debtors will have a reduced debt liability, which it is hoped will be sustainable by them, having regard to known circumstances.
22. The legislation does not expressly require the court to examine the likely circumstances of a debtor after the six-year term of a proposed PIA, but in my view the creditor is correct that a court may not, if it has the evidence before it, disregard the likely or reasonably likely circumstances that will exist at the end of the six-year period of the PIA, or of the reasonably foreseeable future thereafter. There is likely to be a spectrum of circumstances and the degree of certainty regarding future financial circumstances will usually diminish over the middle to long term.
23. The objecting creditor argues that an assumption is made that Mr. Hayes will achieve an increase in his income and that his current part-time employment will be made permanent and full time. I reject that suggestion and consider that the PIAs show that the current known income of the debtors is sufficient to sustain the Arrangements.
24. The primary argument of the objecting creditor regarding the sustainability of the Arrangements, however, relates to the fact that the PIA proposes the restructuring of the term of the secured loan on the principal private residence by extending the term to Mrs. Hayes’ 68th birthday when Mr. Hayes will be 79. It is said that the projected figures unequivocally show on present information a shortfall on family income when Mr. Hayes retires. Present evidence suggests that Mr. Hayes would be entitled to a non-contributory State pension of €219 per week. The evidence is that there is no term in Mr. Hayes’ contract of employment that requires him to retire at an identified age, but it is accepted that it is unlikely that Mr. Hayes would continue working in his current employment in the security industry until he is 79 years of age. It is argued that the evidence suggests that there will be a monthly shortfall of €237 in year 18 when Mr. Hayes retires and where his sole income is his State pension.
25. Counsel for the debtors argues that the old age pension has increased since the affidavits were drafted, and that indeed historically, even during the height of government austerity measures, State old age pensions have increased, sometimes at a level in excess of inflation.
26. The debtors argue that the deficit at its height would be a €157.23 in year 18 and that if, the income of Mrs. Hayes does not increase in the intervening years, the debtors can choose to live below the RLE Guidelines issued by the ISI which provide for a social inclusion amount of €232.47 per month in the set costs, and €65.07 for “savings and contingencies”. It is said that the deficit of €157.23 is approximately half of those amounts which are discretionary and that the debtors are ready to, and will without too much difficulty, be able to then reduce their discretionary spending to deal with the mortgage for the balance of the term. It is argued that the worst-case scenario is predicated on an assumption that there will be no improvement in the income of Mrs. Hayes or no increase in the State pension to which Mr. Hayes would be entitled.
27. The objecting creditor argues that a court may not approve a PIA that requires a debtor to live below the relevant RLE, and that is express in ss. 99(2)(e) and 99(4) of the Act, which provides as follows:
“99.— (1) Subject to the mandatory requirements referred to in subsection (2), the terms of a Personal Insolvency Arrangement shall be those which are agreed to by the debtor and subject to this Chapter, approved by a majority of the debtor’s creditors in accordance with this Chapter.
(2) The mandatory requirements referred to in subsection (1) are:
…
(e) a Personal Insolvency Arrangement shall not contain any terms which would require the debtor to make payments of such an amount that the debtor would not have sufficient income to maintain a reasonable standard of living for the debtor and his or her dependants;
…
(4) For the purposes of subsection (2)(e), and without prejudice to subsection (3), in determining whether a debtor would have sufficient income to maintain a reasonable standard of living for the debtor and his or her dependants under the Personal Insolvency Arrangement, regard shall be had to any guidelines issued under section 23.”
28. That statutory restriction is one that prohibits formulation of a proposal which provides for expenditure below the RLE within the period of the PIA. It does not prohibit a scheme by which a debtor might on current known figures live below the RLE guidelines outside the 6-year term of the PIA. The legislation is formulated to govern spending within the 6-year window as the purpose of the PIA to give breathing space to enable a return to solvency by an insolvent debtor.
29. I accept that a court ought not to approve a PIA when the available evidence suggests that a restructured mortgage is shown on available evidence to be unsustainable and that a debtor is likely to fall into arrears, whether that be on the expiration of the term of the PIA or at an identified time in the future. For debt to be resolved without recourse to bankruptcy the debt solution needs to be sustainable taking into account reasonable expectations and what can now reasonably be predicted for the future: See the discussion in Re Callaghan (a debtor) [2017] IEHC 332.
30. The debtors rely on my judgment in Re Dunne (a debtor) [2017] IEHC 59 at para. 46 that:
“…the court is obliged to enquire as to whether it is reasonably likely that a debtor will meet the terms of the PIA, the court is not required to engage the broader question as to whether the debtor is reasonably likely to be able to perform the obligations as reformulated in the PIA with regard to the repayment of a secured debt over the length of the repayment term.”
31. That dicta cannot be understood outside the context in which it was given and does not mean that a court will not examine the sustainability of a proposal in the light of known future circumstances. The further away one moves from the present and from the 6-year term of the PIA, the less scrutiny is possible or desirable as the court ought not engage in conjecture and prediction. The unusual proposition presented by the PIP in that case was that the PIA include a review provision that would limit the extent of revised payment terms when a warehoused element in the split mortgage was brought back into account. The PIP argued for provisions that could guarantee the continued solvency of the debtor, with a view to “ensuring the continuing solvency of the debtor after the expiration of the PIA” (paragraph 40). He argued for a limitation on the nature and extent of repayment terms, and sought to link a review to the ISI reasonable living expenses and that was rejected by me as being unfairly prejudicial to the creditor.
32. I rejected the argument that the personal insolvency legislation was to be viewed as requiring that a PIA ensure the continuing solvency of a debtor post PIA and as I explained in paras. 56 – 58:
“56. I consider that the scheme of the personal insolvency legislation cannot
be viewed as requiring that a PIA ensure the continuing solvency of a debtor
post PIA. A PIA may fail and the legislation cannot protect against unpredicted
events that give rise to the failure of a PIA in its currency, or thereafter.
57. The purpose of the legislation is to provide a means of orderly debt
resolution, not to guarantee continued solvency outside its timeframe.
58. Further, the statutory provisions do not envisage protection of continued
solvency as a correct approach.”
33. Re Dunne (a debtor) is not authority for the proposition that a court examination of the sustainability of a proposed PIA may not examine likely future circumstances, but reflects the practical difficulty of predicting events far into the future and derives from the nature of the jurisdiction of the court under the Act to assess the sustainably of the PIA in the light of the stated objective to ensure a return to solvency, not guarantee continued solvency in all eventualities.
34. The degree of scrutiny of future events will depend on the factual matrix, and there will be many cases along the spectrum between cases where the future financial circumstances are more or less predictable.
35. The judgment in Re Dunne (a debtor) must be understood in the context of other judgments including Re J.D. (a debtor), where a PIA was approved by the court as the debtor had obtained a court order for maintenance and an attachment of earnings order and was in those circumstances able to show that her projected income was reasonably secure, and because the test of sustainability required the court to “engage the question of reasonableness” (paragraph 82).
36. In Re Callaghan (a debtor), the question arose from a different perspective and the mortgage creditor sought to warehouse part of a debt for 23 years, no proposals or agreements were made as to what should happen at that time, although the creditor was prepared to concede that the security would not be enforced until the death of the last surviving borrower. The objection of the creditor was rejected as it was based on assumptions regarding the likely financial or other circumstances of a debtor far into the future. The “assumptions and conjecture regarding the living arrangements of the debtors far into the unknown future” (para. 79) were factors rejected as having any potential weight or force.
37. The circumstances in which the question of financial affordability or sustainability of the present case are quite different from those in Re Dunne (a debtor). The PIP in Re Dunne (a debtor) sought to make provision for an unknown or contingent difficulty. The figures presented show in the present case an actual shortfall identifiable in the known and knowable repayment schedules. The objecting creditor argues that the proposal identifies a point in the future when the mortgage repayments would be unsustainable.
38. The objecting creditor does not point to any events that cannot now be predicted or are hypothetical or unknown, and points to the known and identifiable fact that in year 16 (or 18) the debtors will not be in a position to meet the repayment schedule unless the income of Mrs. Hayes should increase, an unpredicted and unpredictable event.
39. The court in exercising its power to approve a PIA is required to look at the evidence adduced and to objectively examine that evidence with a view to forming a judgement as to whether a proposal is reasonable and sustainable.
40. In the present case, two factors influence my decision on the sustainability of the PIAs. The debtor may have to live below current RLE figures in year 18. This projection makes assumptions far into the future on which I consider it unsafe to rely as determinative. While the PIA is predicated in part on an assumption that the income of the debtors is unlikely to increased qualitatively over the working lives of the debtors, I cannot safely test the affordability of the mortgage repayments in year 18 against the present salaries and social welfare entitlements of the debtors, nor accept for that reason the argument of counsel for the debtors that the pension benefits may increase by more than inflation over the years. If the debtors are required in year 18 to live below the RLEs they may elect to do so, but may have the benefit of some contribution from their children who may by then be able to assist in a small way to relieve any hardship. All of these scenarios are based on conjecture and may not safely determine the question.
41. The figures presented by the PIP show to my satisfaction that the PIAs are reasonably likely to be sustainable during their term and on into the reasonable foreseeable future. I reject this ground of opposition.
The proposed fixing of interest rates
42. The more difficult question that arises in this appeal is the proposed fixing of interest at a rate of 3.65% over the extended mortgage term of 27 years. The objecting creditor describes this as “completely unheard of in banking practice” and argues that it is unfairly prejudicial within the meaning of the legislation.
43. The PIP, Mitchell O’Brien, in his replying affidavit sworn on 19th October, 2016 explains that he formulated the proposal with a long-term fixed interest rate which is higher than the current variable rate, in order to formulate a “conservative and prudent treatment” of the debt with a view to achieving a sustainable mortgage for the debtors.
44. Section 102(6)(e) of the Act expressly contemplates that a PIA may include a term providing for the change of the basis on which interest is paid, and that interest provisions may be changed from a variable interest rate to a fixed rate, or that a rate may be fixed at a margin above or below a reference rate. Section 102(6)(e) provided as follows:
“(6) Without prejudice to the generality of section 100 or subsections (1) to (3) and subject to sections 103 to 105, a Personal Insolvency Arrangement may include one or more of the following terms in relation to the secured debt:
…
(e) that the basis on which the interest rate relating to the secured debt be changed to one that is fixed, variable or at a margin above or below a reference rate;”
45. In the course of arguments, it was accepted that many proposed PIAs will involve the fixing of interest for an identified period, usually the duration of an Arrangement or to include a short period thereafter.
46. Section 102(6)(e) can be distinguished from the provisions of s. 102(6)(a), (b) and (d) by which is permitted a provision for interest only payments, interest and part capital payments or deferral of a mortgage payment in each case for a period of time which “shall not exceed the duration of the Personal Insolvency Arrangement”, i.e. for a maximum of six years. No such temporal limitation is placed on a proposal to fix interest rate, or to track it to another identifiable rate.
47. Thus, the statute permits that interest rates may be fixed or variable, or linked to a reference rate, and the legislation does not limit the period of time for which this can be done.
48. The objecting creditor has dealt with the proposed long term fixing of the rate of interest in two affidavits of a director Jeffrey Johnston, sworn on 3rd October, 2016 and 5th of December, 2016 respectively. Mr. Johnston describes the restructured term and the fixing of the interest rate over such a long period as “commercially unjustifiable” and as almost certain to lead to future losses to the creditor. Mr. Johnston avers that the proposal to fix a rate of 3.65% “represents a radical departure even from the most competitive rates available on the open market” and argues in the circumstances that it is “objectively unreasonable”.
49. Mr. Johnston goes on at para. 25 to say that:
“I say that it would be impossible for the Objecting Creditor to borrow an equivalent sum to the restructured mortgage at 3.65% fixed rate over anything approximating a 27-year period. The reason for this is that, although short term base interest rates are at historically low levels, it becomes increasingly difficult to project what the prevailing interest rates will be as the time horizon extends. Barring an unprecedentedly protracted period of interest rates remaining anchored at or near their theoretical minima, interest rates will eventually fluctuate and, in this regard, the only direction in which it is possible for them to fluctuate is upwards”.
50. Mr. Johnson then goes on to say that as “no lender on the open market is offering a fixed rate term even close to the term proposed” this term of the PIA is unjustly prejudicial to the objecting creditor.
51. The final affidavit in the sequence is the supplemental affidavit of Mr. Johnston. Evidence is adduced of products at present available in the Irish market: a ten-year fixed interest rate offered by Bank of Ireland at 4.2%, and a five-year rate at 3.55%, which Mr. Johnston says, “reflects the market risks of fixing for a term that is almost one third of the proposed fixed term under the arrangement”.
52. Mr. Johnston says it would be impossible to quantify the actual loss a lender might suffer if interest were fixed at a low level which did not reflect, or in some way track, ECB base rates.
53. I am not satisfied that the test for which the objecting creditor contends is based on a correct assumption. The objecting creditor is not a bank but an investment fund, and while the affidavit evidence of Mr. Johnston refers to the risk that “a lender” might suffer loss were interest rates to be set at a low level over a long period and not be fixed in relation to, or in some other way track, ECB base rates, the affidavit of Mr. Johnson does not say or suggest as a matter of fact that the objecting creditor will require to return to the market to meet its capital needs in the future or fund the investment. The terms on which the asset was purchased or how it was financed are not identified.
54. In that context, I bear in mind the fact that what is proposed by the PIA is not that the mortgage debt will be refinanced, but that it be restructured. The test that the court engages therefore in considering the reasonableness of a proposed long-term interest rate, whether fixed, variable or linked in some way to the ECB rate or other rate, is not always to test the rate against the projected future borrowing needs of a mortgage lender, and in the present case the fairness of the rate is to be tested in the light of the actual circumstances of the objecting creditor. The loan is an asset of the objecting creditor, secured over real property and the proposal offers a fixed, albeit long term, return on the investment, with the repayments proposed at an amount certain over the term.
55. I consider in those circumstances that the asset value might perhaps be more accurately compared to that of a bond and that the objecting creditor may establish that the return from such an investment is unfairly or prejudicially low by reference to an investment or bond market, and not to interest rates. I consider that the Act envisages circumstances where a court might be prepared to accept as not unfairly prejudicial a long-term fixed interest rate where the court would test the reasonableness of such rate having regard to factors other than those that would be in the mind of a lender granting finance. While it is necessarily the case that an interest rate may reflect the ability of a lender to borrow, the interest rate proposed by the PIP in the present case is to be tested against the future costs of, or value to an investor not a lender.
56. A court may take various factors into account including the fact that the benefit of the secured loan is owned by an investment vehicle and not a commercial bank, that the loan remains secured, and that should the real property on which the loan is secured come to be sold in the future at a price greater than that on which a proposal is predicated that there exists a statutory provision for claw back contained in section 103(3), (4) and (13).
57. In those circumstances, I am not satisfied that the objecting creditor has shown me sufficient evidence that the proposed fixing of interest would, over the balance of the extended term of 27 years, be unfairly prejudicial to it merely on account of the interest rate, and the evidence adduced on the part of the objecting creditor, while it is clear and complete, is predicated on a treatment of the objecting creditor as a lending bank, and not as an investment fund. I have insufficient evidence on which I could conclude that the proposal to fix the interest rates for the proposed extended term is unfairly prejudicial to the objecting creditor having regard to its status.
58. However, the matter does not end there, and one approach mandated by the Act in order to test unfair prejudice is to look to the likely return in bankruptcy, namely that the return to the objecting creditor not be less than that that would be achieved on a bankruptcy in which one is to assume that the secured premises would be sold. In the present case that test comes into sharp relief.
Likely return on bankruptcy
59. I considered the requirement that a court would look to the likely outcome in bankruptcy as one means by which the court would consider the fairness of any prejudice likely to be suffered by a creditor in J.D. (a debtor) at paras. 62 and 69 and will not repeat them here. Both parties to the present case accept that it is appropriate that the court would make a comparison with the likely bankruptcy outcome, and the Act expressly makes reference to the comparison as a factor relevant to the test for unfair prejudice. Section 107(1)(d)(i) of the Act sets out the requirement that the comparison be engaged:
“107. — (1) The documents referred to in section 106(2)(b) and section 111A(2)(b) (inserted by section 17 of the Personal Insolvency (Amendment) Act 2015) are—
…
(d) a report of the personal insolvency practitioner—
(i) describing the outcome for creditors, and having regard to the financial circumstances of the debtor whether or not the proposed Personal Insolvency Arrangement represents a fair outcome for the creditors, and indicating, where relevant, how the financial outcome for creditors (whether individually or as a member of a class of creditors) under the terms of the proposal is likely to be better than the estimated financial outcome for such creditors if the debtor were to be adjudicated a bankrupt (having regard to, amongst other things, the estimated costs of the bankruptcy process);”
60. The bankruptcy comparison contained in the proposed PIA shows a total return on the PIA to the secured creditor of €196,853.74, being €190,000, the capital value of the reduced mortgage, plus, bearing in mind that the written down balance of the mortgage debt ranks as an unsecured debt, an unsecured creditor dividend of €6,853.74.
61. The objecting creditor disagrees with that valuation, and para. 22 of the affidavit of Jeffrey Johnston sworn on 3rd October, 2016 proposes a valuation that tests the present value of the restructured mortgage, taking an annualised discount of 5% (the projected annualised cost of funds for 27 years), and arrives at a figure of €173,384. Adding the dividend for unsecured creditors of €6,854, a return therefore of €179,295 is shown on this basis.
62. The evidence of the PIP is that on the revised mortgage debt of €190,000 at the proposed fixed interest rate the interest payable amounts in total to €123,915 (replying affidavit of Mitchell O’Brien sworn on 19th October, 2016), and that this, when taken in conjunction with the fact that the objecting creditor continues to have the benefit of security over the capital sum, is a better outcome than that calculated on a simple basis of present value calculation.
63. I consider that the PIP is correct. The calculation is not to be done on a present value basis without having regard to the entire proposal, which in the present case includes fixed payments over the term, security over real property, and a claw back should the property sell in the first 20 years at a value higher than that on which the calculations are based.
64. There is disagreement too regarding the return on bankruptcy. The evidence of the debtor is that, taking the principal private residence as having a value of €190,000, after the costs of sale and administration fees the amount available for distribution to creditors on bankruptcy is €171,000.
65. The PIP therefore says the return in bankruptcy is 53% of the current loan balance, and the return on the combined PIAs is 61%.
66. A dispute arose in that context regarding a discount of 10% proposed by the PIP as the relevant deduction, and the PIP said that a discount of 10% is recognised by the ISI and by the Official Assignee in Bankruptcy as accurately representing the likely costs in bankruptcy. I accept the argument of the objecting creditor that it is not correct to assess the likely return on bankruptcy on the basis that it is likely that in the present case the secured creditor will incur legal costs in pursuing possession of the premises having regard to the fact that proceedings are already in train and have been stayed pending this process. I consider the correct approach is for the court to calculate the likely return on bankruptcy on the basis that the costs are to be assessed without exceptional factors such as the costs of repossession proceedings.
67. The objecting creditor on that basis calculates a return on bankruptcy if it chooses to rely on its security of €183,254.90, allowing for sale costs of €6,745.10. That is a return on my calculation (taking round figures) of approximately 57%, 4% higher than the figure proposed by the PIP.
68. However, even on that calculation the return on the interlocking PIAs is better on the calculation of the PIP.
Unfair prejudice: the test
69. Shoreline argues that the proposed arrangement is unfairly prejudicial to its interests. I examined the concept of unfairness in Dunne & Personal Insolvency Acts size=”2″ face=”Verdana”> [2017] IEHC 59 and also in Re Callaghan (a debtor).
70. As Clarke J. said in Re McInerney Homes Limited [2011] IEHC 4, any write down of a debt is likely to be prejudicial to a creditor, an observation made in the context of examinership, which contains a broadly similar statutory scheme for the restructuring of corporate debts, where restructuring can involve a reduction of the capital owed. It is only where the consequence is not merely prejudicial to the interest of the creditor, but unfairly so, that the court must decline to make the order.
71. I do not consider a mathematical difference taken alone may create an unfair prejudice. Unfairness is tested in the light of all the circumstances, and the primary loss to the creditor arises from the loss of market value in the principal private residence and the fact that the debtors have a significant negative equity as a result. I am not persuaded that the question of fairness is to be tested wholly on a mathematical basis, and even if it were, the differential would not justify the rejection of the proposed PIAs having regard to the stated objective of s. 115A and s. 104 that a PIA should endeavour to contain a term that protects the principal private residence insofar as this is reasonable and not unfair.
72. A court considering whether to make an order under s. 115A of the Act must have regard to the mandatory conditions set out in subsection 9. Those mandatory conditions require that the court consider all the circumstances, including whether the proposed PIA creates a reasonable prospect that a debtor will not be required to cease to occupy or own his or her principal private residence. The court is mandated to have regard to the specific question whether the proposed PIA would enable a debtor to resolve his or her indebtedness without recourse to bankruptcy and enable creditors to recover the debts due to them to the extent that the means of the debtor reasonably permit. The comparison with bankruptcy is put at the centre of the analysis, but having regard to the fact that the court must examine whether the proposed PIA enables the creditor to recover the debts as is “reasonably” possible having regard to the means of the debtor, I do not consider that the legislation envisages a merely mathematical exercise.
73. I consider also that the legislation envisages that the preferred option is to avoid that the debtor would have recourse to bankruptcy, and the legislation is framed in a manner which suggests that preference. The relevant provisions of s. 115(A)(9)(b) support this:
“115A (9)(b) having regard to all relevant matters, including the terms on which the proposed Arrangement is formulated, there is a reasonable prospect that confirmation of the proposed Arrangement will—
(i) enable the debtor to resolve his or her indebtedness without recourse to bankruptcy,
(ii) enable the creditors to recover the debts due to them to the extent that the means of the debtor reasonably permit, and
(iii) enable the debtor—
(I) not to dispose of an interest in, or
(II) not to cease to occupy,
(III) all or a part of his or her principal private residence”
74. The language of “unfair prejudice” is found in s. 115A(9) and also in s. 120(e) and forms the basis on which a creditor may object to a PIA under s. 114 of the Act. What is unfair will depend on the circumstances, including the likely return on bankruptcy, but a test of fairness invokes a comparison or comparative analysis and the principles of proportionality. A proposal in a PIA which disproportionally prejudices a creditor is likely to be unfair, and disproportion could be found if the likely result in bankruptcy, would be not just marginally better than under a proposed PIA, but materially so. It could arise for example if a principal private residence was of a size, value or condition that could not justify its retention.
75. Whether a proposal is unfair must also have regard to the stated statutory objective which is contained in s. 115A but also in the earlier s. 104, that a proposed PIA should insofar as this is practical, seek to preserve the occupancy or ownership by a debtor of his or her principal private residence. The purpose of the amending legislation, in particular s. 115A, and the purpose of s. 104 which was found in the original Act of 2012, was to protect the interest of a debtor in the principal private residence, and no such protection is found in respect of other property.
76. A proposed PIA is not of itself unfairly prejudicial merely on account therefore of the fact that the likely return on bankruptcy could be marginally better.
77. Equally, the court in considering whether a proposed PIA is unfairly prejudicial must examine the actual circumstances of the creditor, and in the present case a particular focus of the argument arose from the evidence adduced on the part of Shoreline regarding likely lending rates in the Irish market in the near and not so near future. However, Shoreline is not a lender, and accordingly the test of unfair prejudice regarding its interest must be seen in the light of investment returns and not the cost of the capital needs of the creditor in the future. The examination of the fairness is conducted in the circumstances of the case and having regard to the financial profile of the objecting creditor and the means of the debtor.
The means of the debtor are to be brought to bear
78. The legislation expressly requires the court to consider whether the means of the debtors have reasonably been brought to bear in the proposal. This is an important factor in the present case and the PIP says he has formulated the PIAs in a conservative way to achieve the protection of their principal private residence.
79. The present case concerns a family of modest means, who occupy a modest principal private residence with their small children. I accept the argument of the objecting creditor that an extended mortgage term which will leave a person with mortgage debt into his or her retirement would not always be desirable. The factor which makes the present proposal acceptable is that Mrs. Hayes is significantly younger than her husband, her income is secure, and the proposed extended mortgage term will not continue far into her retirement.
80. The other factor that influences me in the present case is that the proposed fixed interest rate mortgage payment provides for an equal monthly instalment over the entire period of the mortgage of €1,080.58, and having regard to the modest income of the couple, and the age of Mr. Hayes in particular, this must be seen as the only proposal which could be presented to creditors and which would secure the ongoing occupation and ownership by the couple of their home. The proposal undoubtedly will stretch the couple in their later years, and even if I cannot accept the invitation of their counsel to make a working assumption that by the time Mr. Hayes retires the State Old Age Pension will have increased somewhat, and Mrs. Hayes’s income may have increased, even if only in line with inflation, I am satisfied that the PIAs and the mortgage repayment following successful completion of the PIAs are capable of preserving the principal private residence.
81. In no sense could it be said that Mr. and Mrs. Hayes are obtaining a benefit or a bonanza from the write down of their debt, the extension of the term of their mortgage, and the fixing of interest rates. Rather, a result of the PIAs they will be returned to solvency, and they are likely to remain solvent, insofar as this can be reasonably predicted, albeit their discretionary income will, barring exceptional and unanticipated circumstances, be modest.
82. No provision is made for the costs of third-level education for their children, and counsel for Shoreline argues this suggests that the PIAs are not sustainable and that the debtors will fall into financial difficulty by year 7 or 8 when the elder child might want to undergo third-level studies. That factor is not one that would influence me to reject the proposed PIA, as the evidence is that the likely cost of rental property would be the same or not materially lower than the projected mortgage repayments, and preservation of the principal private residence for the couple and their children is likely to be more beneficial to the children than the sale of that home in a bankruptcy, and the move to rental accommodation, where security of tenure is not guaranteed. The likely cost of third-level education furthermore is mere conjecture at this point in time.
Decision
83. Taking all of these circumstances into account, and noting that the case has a number of unusual features, I propose making an order allowing the appeal and providing for the coming into force of the PIA notwithstanding its rejection at the meeting of creditors.
Re: Douglas, a debtor
[2017] IEHC 785
JUDGMENT of Ms. Justice Baker delivered on the 29th day of November, 2017
1. Mitchell O’Brien, the personal insolvency practitioner (“PIP”) made a proposal for a personal insolvency arrangement (“PIA”) under the Personal Insolvency Acts 2012-2015 (“the Act”) pursuant to his function in that regard which was rejected at a statutory meeting of creditors held on the 1st April, 2016.
2. On the 19th October, 2016, on application for a review pursuant to s. 115 A (9) of the Acts, Ms. Justice Enright, judge of the Circuit Court refused to approve the PIA and upheld the objections of Allied Irish Banks PLC (“AIB”) and EBS DAC (“EBS”).
3. This judgment is given in the appeal from that decision of the Circuit Court and raises two important issues under the Acts, namely the identifying features of a class of creditors for the purposes of a review under s. 115A, and the treatment of a “non core” asset, a residential dwelling owned by the debtor subject to a mortgage in which her parents reside.
Factual background
4. The debtor is a married woman with three young dependent children and lives apart from her husband. She derives her income from a small business in County Waterford employing nine persons, some full-time and others part-time. Her principal private residence in Waterford city is subject to possession proceedings initiated by EBS which stand adjourned pending the determination of the insolvency process. Before the insolvency process was initiated the debtor had dealt with some of her creditors and reached agreement to reschedule the secured debt on the commercial premises from which she runs her business.
5. The assets of the debtor comprise three real properties, her principal private residence held by her subject to a mortgage in favour of EBS, a commercial unit in Waterford held by her subject to a mortgage to Lisduggan Credit Union (“Lisduggan”), and a premises at Dunmore Road, Waterford held by her subject to a mortgage in favour of KBC Bank Ireland plc (“KCB”) which is occupied by her parents and who make no direct rental or other payments in respect of their occupation.
6. The principal private residence is valued at €215,000 and the balance outstanding on the secured debt is €329,629.
7. The premises at Dunmore Road Waterford, occupied by the parents of the debtor, has a value of €142,000 and the secured debt outstanding is €244,120.
8. The commercial unit at Waterford has a value of €80,000 and is held subject to the security interest of Lisduggan Credit Union, the current balance outstanding in respect of which is €62,152.
9. The debtor in addition has unsecured loans of approximately €50,000, of which more than €33,000 is owed to AIB.
10. The total current value of the assets of the debtor is €357,000 (including the value of her motor vehicle) and her liabilities are €687,611.
The proposed PIA
11. The PIA proposes, inter alia, the following in regard to the treatment of the secured debts:-
(1) That the debtor retain her principal residence, that the interest rate be reduced to 0.5% for the six year period of the PIA, interest revert to a standard variable rate at the expiration of the PIA, and the term of the loan be extended;
(2) That the debtor retain the premises in which her parents live, that the term of the secured loan be extended and the interest rate remain the same;
(3) That the debtor retain the commercial unit, and that the arrangements already agreed with Lisduggan would continue.
12. A number of issues were canvassed in the course of arguments, and six affidavits in all were filed by the parties.
13. The first objection made by the creditors is that the jurisdictional requirements for the making of an application for review under s. 115A have not been met, and that a class of creditors did not vote in favour of the proposal. I propose first considering this issue because it may be determinative of the application.
The threshold test
14. Section 115A provides for application for review by the relevant court following the rejection of a proposed PIA by a meeting of creditors, and the court has power to approve the coming into operation of a PIA notwithstanding its rejection of the meeting of creditors. Before the statutory power may be invoked at least one class of creditor must have accepted the proposed arrangement by a majority of over 50% of the value of the debts owed to that class: Section 115A(9)(g)
15. Section 115A(9)(g) sets out the threshold requirement that:-
“other than where the proposal is one to which section 111A applies, at least one class of creditors has accepted the proposed Arrangement, by a majority of over 50 per cent of the value of the debts owed to the class.”
16. An argument is made that no class of creditor voted in favour of the proposed PIA.
How is a classes of creditors to be determined?
17. The application pursuant to s. 115A is to be accompanied by a statement of the PIP setting out the grounds of the application which shall include pursuant to 115A(2)(a)(ii) the followings:-
“(ii) other than where the proposed Personal Insolvency Arrangement is one to which section 111A applies, a statement identifying, by reference to the information referred to in paragraph (d)(i)(II) contained in the certificate furnished under paragraph (d), the creditor or creditors who, having voted in favour of the proposal, should, in the opinion of the personal insolvency practitioner, be considered by the court to be a class of creditors for the purpose of this section, and giving the reasons for this opinion,”
18. Section 111A deals with circumstances where no creditor supports the proposal and is not relevant to the present case.
19. The ascertainment of the classes of creditors is one made by the court and not by the PIP, although the PIP proposes the distinct classes. Section 115A(2) requires the statement of grounds lodged to initiate the process should identify the classes of creditors proposed by the PIP and the reason for the classification.
20. The question arising for consideration in the present case is whether the class of creditors identified by the PIP in his statement grounding the application may properly be regarded as a class. The PIP identified KCB and Lisduggan collectively as a class of creditors which voted in favour. AIB and EBS voted against the proposal.
21. The PIP furnished a certificate showing the proportions of the respective categories of votes cast by those voting at the meeting of creditors, and identifying the creditors who voted in favour of and against the proposal, and the nature and value of the debt owed to each.
22. All creditors attended the meeting of creditors, 46% of the total creditors in value voted in favour, 54% against; 49% of the secured debt voted in favour and 54% against; the unsecured creditors all voted in favour.
23. The Pip proposes for the purpose of the application under s.115A two classes of secured creditors: KBC and Lisdduggan a class voting in favour; and AIB and EBS voting against.
24. The objecting creditors argue that the distinction made in the certificate of the PIP between two types of secured creditors is “manufactured” or artificial and not in accordance with the subsection. In particular it is argued that the interest or claims of the three secured creditors are not sufficiently different in relation to the debtor to justify identifying two classes of secured creditors. The objecting creditors argue that there is one class of secured creditors, and it voted against the proposal.
25. The PIP argues that the creation of a class comprising the credit union and KBC the owner of security over real property which is not the principal private residence of a debtor is justified. The argument is based on two propositions, one relating to the statutory nature of a credit union, and the other relating to the distinct interest of a creditor holding security over the principal private residence of a debtor.
The ascertainment of the classes
26. Section 115A(17) makes provision for how the court is to determine the membership of a class of creditors.
27. The governing section is 115A(17)(a)(ii) by which the court is to have regard whether the creditors “have, in relation to the debtor, interests or claims of a similar nature”
28. For the purpose of the ascertainment of the nature of the interests of the creditors guidance is provided in s. 115A(17)(b) and the general proposition is that the court shall have regard to the circumstances of the case including, the matters expressly identified as follows:-
“(b) In deciding under paragraph (a) whether to consider a creditor or creditors to be a class of creditor, the court shall have regard to the circumstances of the case, including, having regard to the statement of the grounds of the application referred to in subsection (2)(a) and the certificate referred to in subsection (2)(d)(i) —
(i) the overall number and composition of the creditors who voted at the creditors’ meeting, and
(ii) the proportion of the debtor’s debts due to the creditors participating and voting at the creditors’ meeting that is represented by the creditor or creditors concerned.”
Is the Credit Union a separate class?
29. The first proposition is that Lisduggan may be treated as a separate class because of its legal standing as a mutual lender, and because it is not a credit institution. The governance and ownership of a credit union is regulated by the provisions of the Credit Union Act 1997. Pursuant to s. 17(2) of that Act, membership is limited to those persons who have a “common bond” as set out in the Rules of the credit union. A credit union is a society registered under the Act and is not within the class of “credit institution” as therein defined.
30. The debtor argues that in the circumstances where membership of the credit union is confined, and where the rules governing membership are determined under the 1997 Act, that it is appropriate to characterise a credit union as a “mutual lender class” for the proposes of the threshold requirements under the Act. It is argued that because of the legal status of the credit union, and because members operate under a “common bond”, usually arising by virtue of their residence in a defined local area, that the interests of a credit union may be different from those of a bank or credit institution which trades as a limited liability company, or a regulated bank.
31. Counsel for the objecting creditors argues that Lisduggan is a creditor holding security and that the functioning of the Act would not be furthered if there was an undesirable and unwieldy proliferation of classes of creditors. It is argued that the material defining characteristic is that the debt is secured.
Decision on question of characterisation of the credit union
32. Guidance on the ascertainment of the material classes may be obtained from the judgment of Laffoy J. in Re Millstream Recycling Limited [2009] IEHC 571. Laffoy J. was considering the exercise of the court of its discretion under s. 201(2) of the Companies Act 1963 to sanction a scheme of arrangement, and whether separate meetings of creditors were required. She quoted with approval the test identified in the judgment of Bowen L.J. in Sovereign Life Assurance Company v. Dodd [1892] 2 QB 573 on the construction of the word “class” in the equivalent English statute as follows:-
“The word ‘class’ is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term ‘class’ as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.”
33. That dicta was later followed by Chadwick L.J. in Re Hawk Insurance Company Ltd. [2002] BCC 300.
34. Laffoy J. held that the class was to be ascertained by the following question:-
“are the rights of those who are affected by the scheme proposed such that the scheme can be seen as a single arrangement; or ought to be regarded, on a true analysis, as a number of linked arrangements?”
35. As she said it is necessary to ensure:-
“not only that those whose rights really are so dissimilar that they cannot consult together with a view to a common interest should be treated as parties to distinct arrangements and have their own separate meetings”,
but also to ensure that those
“whose rights are sufficiently similar to the rights of others that they can properly consult together should be required to do.”
36. Laffoy J. approached the matter in this two-fold way and concluded as follows:-
“While there are inevitably distinctions in the detail of the claims of the contamination creditors (such as their precise value, procedural progress and so forth), in their basic form, these claims are characterised by an overriding similarity: the claims themselves are of a similar nature; they fall to be determined on similar bases; they arise from the same incident; and, in all cases, the creditors have suffered considerable hardship.”
37. I consider that a credit union or other mutual lender may not be characterised as a separate class of creditors merely on account of the rules governing membership of the society, as these rules are relevant to the nature or legal status of the entity, and do not regulate the nature of the loan contract. The Act requires that the members of a class of creditors have a claim or interest of a similar nature. The test is relational and assesses the nature of the claims or interests of a creditor against the debtor in a debt for the purpose of the insolvency process.
38. A loan may be made by a credit union only to a member but that fact does not identify the nature of the loan or the nature of the interest that the creditor might seek to protect in the insolvency process. The mutuality arising from membership of a credit union is one relevant to the members of the credit union, but not of itself one that determines how one is to treat a loan from such an entity in the context of a PIA. I consider therefore that merely on account of the fact that the credit union has a legal status as a mutual lender, or is an entity regulated by a statutory scheme different from that regulating a different creditor, does not of itself mean that a loan from a credit union is to be treated for the purposes of s. 115A as a separate class of loan.
39. How the interests or claims of a creditor are to be assessed for the purposes of ascertaining the class of creditors to which it belongs will depend on such matters as whether the loan is secured or unsecured, or whether the loan is secured on the principal private residence of the debtor or on other property. I consider therefore that the argument that the credit union is to be characterised as a separate and single class of creditors is wrong in the present case, as the credit union is a secured debtor holding security over a commercial property and it may more properly be characterised as the class of secured creditors who do not hold security over the principal private residence of the debtor.
40. Therefore I do not consider that the PIP is correct to argue that the mutual lender is a separate class of lenders in the present case, but I do consider he is correct in his grouping together of the KBC and Lisduggan loans together as one class for the following reason.
The creditors holding security over the principal private residence
41. Section 115A(2)(a)(ii) provides that the ascertainment of the classes is to be made “for the purposes” of the section. Therefore the classes are not always those identified in a proposed PIA, as the rights of a creditor holding security over a principal private residence may be different from those of other creditors holding security. The provision by which the PIP proposes the classes of creditors for the purpose of s.115A was introduced in the Act of 2015 for the purpose of the making of an application under 115A.
42. Section 115A provides a special protection for the principal private residence of a debtor and enables a court to approve the coming into effect of a PIA notwithstanding its rejection at a meeting of creditors if certain conditions are met. The primary condition is that the proposed PIA will enable a debtor to continue to occupy or own his or her principal private residence: s. 115A(9)(b)
43. The Act also envisages special protection for the principal private residence in that s. 104 provides that a PIA should insofar as may be reasonably practicable not require that a debtor cease to own or occupy his or her home. But the interest of a creditor holding security over a principal private residence has a particular focus when a court is exercising its jurisdiction under s. 115A, as that section is formulated to enable a court to approve a PIA if the principal private residence can be retained.
44. The nature of the protection was considered in Re Sarah Hill xxx and Re JD 2017 IEHC 119.
45. I consider therefore that a creditor holding security over a principal private residence is capable of being considered as a separate class of secured creditors for the purpose of s.115A because its interest is at the centre of the considerations of the court under the section.
46. For these reasons, I consider that in the present case there can be ascertained two separate classes of secured creditors, one class comprising the creditor holding security over the principal private residence EBS, and the other comprising the two creditors holding security over the non principal private residence and the commercial unit.
47. There is a separate class of unsecured creditors.
48. One class, the class of secured creditors holding security over assets not comprising the principal residence of the debtor, voted in favour and the threshold test is established.
Unfair prejudice?
49. The objecting creditors argue that the proposed PIA is unfairly prejudicial. This argument is made on a number of grounds but primarily because it is argued that the means of the debtor are not reasonably brought to bear in the proposed PIA as is mandated by s. 115A(9)(b)(ii). This arises primarily because of the proposal that the debtor would retain the residential premises in which her parents live. It is argued that this imposes an unnecessary and unjustifiable burden on the debtor, and that the affordability of the arrangement is negatively impacted by the ongoing payment by the debtor of the mortgage on the premises in which she does not herself reside as it is an unnecessary burden on her outgoings.
50. AIB and EBS argue that no justifying reason is given why the parents of the debtor could not contribute towards the payment of the mortgage on the premises where thy live, either by paying the mortgage directly or by paying rent.
51. The PIP counters the argument by pointing to the fact that the debtor’s parents, who are retired, take care of her dependent children during the working week thereby relieving her of childcare expense, an allowable expense within the Reasonable Living Expenses as identified by the Insolvency Service of Ireland. The PIA does not make any provision for childcare costs and the evidence is that monthly outgoings have been reduced by €1,200 as a consequence. The PIP argues that the retention of the premises in which the parents of the debtor reside is not placing a burden on her but is generalising what is described as “income benefit” in that it frees up income which would otherwise be expended on childcare costs.
52. The debtor says that she works on average 80 hours per week in her business and that this is facilitated by the fact that her mother takes care of her children without charge while she is at work.
53. However certain facts in the proposal are less than clear. The proposed PIA shows that the debtor’s mother receives €300 per week in respect of her part time work in the company. It seems that the father of the debtor also works in the company but he does not receive remuneration. Why the debtor’s father does not receive a salary, and how the debtor’s mother can look after the children and work part time in the business is not explained.
54. Some information is available as to how the premises in which the debtor’s parents live came to be vested in the debtor. It seems that this premises was the home of her parents until in or about 1995 and the debtor is her affidavit says that it was “given” to her “for the purposes of securitising a mortgage” to finance the then business operated by her through a different company.
55. At paragraph 17 of her affidavit sworn on 1st July, 2016 the debtor says the following
“The property was transferred to me to allow me build my business and support my family on the basis that I would allow my parents to reside therein without any rent. The strict understanding of the transfer was that my parents would not, essentially, have to pay for the same property twice, be it in the form of a mortgage, rent or otherwise. I say that same is entirely logical in circumstances where they had fully paid a mortgage and did not need to rent a property for the duration of their lives.”
56. Later in her affidavit the debtor makes a statement which adds to the confusion, and after saying that it is “logical and realistic” that her parents do not pay a rent for the premises she goes on to say that that would “be paying a rent to live in their own unencumbered family home for which they paid a mortgage in full”. This statement is not consistent with the legal title to the premises which is held in the debtor’s sole name, and suggests that the arrangement between the debtor and her parents is more complex than that she has identified. I cannot determine the matter by relying on conjecture or hypothesis however, and again the matter comes down to the assessment of the income figures.
57. The folio has been exhibited and this does not show any right of residence or right of maintenance in favour of the parents of the debtor in the premises which is registered in the debtor’s sole name. The deeds or other written agreements have not been exhibited, and the debtor’s parents have not sworn an affidavit nor are they on notice of this application. Indeed whether notice could be given to them of the application, or whether they would have a right to be heard, is doubtful having regard to the scheme of the Act.
58. I have some difficulty in understanding the precise role that the mother of the debtor plays in her business, the reason why she and not her husband is paid for working in the business, how the taxation of the benefit in kind in lieu of childcare is dealt with, but I note these in passing only. They do however suggest to me that the debtor’s finances are, as she herself fairly says, on somewhat of a knife edge, that the structures she is proposing to put in place are unusual, and that in those circumstances the degree of scrutiny engaged by the objecting creditors can readily be understood.
59. In considering whether a proposed PIA makes reasonably practicable provisions for the retention of a principal private residence of a debtor, regard is to be had to the matter set out in s. 104(2) including the costs likely to be incurred by the retention of that premises identified in s. 104(2)(a) as follows:-
“ …. rent, mortgage loan repayments, insurance payments, owners’ management company service charges and contributions, taxes or other charges relating to ownership or occupation of the property imposed by or under statute, and necessary maintenance in respect of the principal private residence”
60. While these types of expenditure are the expression of the legislature of the likely costs of the retention of a real property asset in which a debtor resides, these types of outgoings identity the likely cost of the retention of other real property.
61. The likely true costs of retaining the premises in which the parents of the debtor reside are not accounted for in the proposed PIA. The true costs of the retention of the dwelling house in which the parents of the debtor reside are not identified and therefore to test the sustainability of the retention of that property creates some difficulty.
62. What is argued by the objecting creditors in a general way is that the retention of a real property from which no income is derived is burdensome and creates a drain on income resources which is not justifiable in the circumstances. I consider that the objecting creditors are correct in this in the circumstances of the present case.
63. Therefore I consider that the means of the debtor have arguably not been brought to bear on the arrangement and that the test in s.115A(9)(b)(ii) as explained in Re Dunne 2017 IEHC 59 is not satisfied.
64. I turn now to consider other factors relevant to my decision.
The statutory protection for the principal private residence
65. A personal insolvency arrangement may not by virtue of s. 99(2)(d) require a debtor to sell any of his or her assets that are
“reasonably necessary for the debtor’s employment, business or vocation unless the debtor explicitly consents to such sale”
66. In that context the retention of the factory premises may be justified.
67. But the residential dwelling in which the parents of the debtor reside does not have the benefit of any statutory protection even if the premises is one occupied by persons to whom the debtor has a moral obligation or the type of legal unregistered legal obligation at which the debtor hints.
68. In those circumstances the fact that the retired parents of the debtor continue to reside in the premises held in their name until 1995 or thereabouts, cannot influence me in coming to a decision as to the reasonableness of the proposal or its sustainability, and the test that I must apply is one that will engage the balance between the income and outgoings of the debtor, and whether the income and financial mens of the debtor are sufficiently brought to bear on the arrangement.
69. I turn now to consider whether the proposed arrangement is sustainable in all of the circumstances.
Is the arrangement sustainable?
70. It is also argued that the proposed PIA is not reasonably sustainable.
71. The debtor contends that the current circumstances by which her father works without pay in her business, and her mother cares for her children without pay, contributes €2,166 monthly to her net disposable income, or more correctly reduces by that sum the net demands on income, and argues that this compares favourably with the €946, the current monthly payment on the KBC mortgage. That calculation does not take account of the €300 per week paid to the debtor’s mother to work in her business.
72. As explained above, the lack of full information makes it impossible for me to come to a clear view other than in a general way whether as argued by the debtor the retention of the premises in which her parents live is cost neutral, or provides an income benefit to her. The figures and absence of clarity simply do not enable me to support her proposition.
73. Further, I am not persuaded that the company is capable of sustaining the arrangement. I turn now to examine the evidence regarding the business of the debtor.
The company
74. Prior to January, 2016 the debtor was the owner of and traded through a company Strongrose, now in liquidation. The business operated by that company was the making of blinds and Strongrose traded as Tara Blinds. That trade or business has now been transferred to another company Micore Ltd described in the PIA as a “new company”. Strongrose became insolvent due to what the debtor describes as “historic liabilities” but she says the new company is “different and is profitable on an ongoing basis”. The debtor denies that she has merely “replicated” the business of the liquidated company in the new entity and says that she has made changes to the business which has been “streamlined”.
75. The PIA describes the new business of Micore Ltd as having the “migrated” from the company now in liquidation “in an effort to ring fence the business and core legacy debt”, said to be mostly owed to revenue which the Tara Blinds business “would not have been in a position to address”. I do not propose engaging with the question raised in affidavits and in submissions as to whether the new company is a “phoenix company” although I do not regard it as irrelevant that the old company ceased trading with significant liabilities and was insolvent.
76. However, I accept the argument of the objecting creditors that the circumstances of the setting up of the new company might make the support of trade creditors, Revenue and banking creditors “fragile” given the failure of the previous business and that the probable lack of support in those circumstances is a fact that should be taken into account in assessing the financial strength of the company.
77. The trading record of Micore from which the debtor derives her total income is available only for the period of seven months after the 31st July, 2016. The profit and loss account shows a profit for the seven month period ending in the 31st July, 2016 of a little over €20,000 and shows a director’s salary of €4,660 paid to the debtor when she was a director. She has since resigned as director.
78. To meet the requirements of the proposed PIA the debtor will require an income of €49,000 per annum from the company and the figures extrapolated from seven months do not support such annual drawings or salary.
79. Another factor that must weigh in my consideration is that the debtor is quite clear that her current income from her business is dependant on the unpaid work of her parents. Her parents are both in their late sixties and while I accept that they may be willing and able to work at present, it is less clear that they will be able to work at the level required to support the business even for the six year term of the PIA
80. The debtor has also produced a business plan prepared in March, 2016 in which it is projected that the business will be profitable “within its first trading year”. No updates on those figures were adduced in evidence. This judgment is given in an appeal of an order made in the Circuit Court and the evidence is that placed before that court, affidavit evidence sworn between June and September, 2016. No update in the figures was sought to be adduced although the appeal was not heard for a year after the judgment was given on the 14th October, 2016 by the Circuit Court. While in general an appeal from the Circuit Court is determined on the evidence before that court, provision does exist for the making of an application to adduce further evidence. Having regard to the level of doubt expressed in the replying affidavits as to the sustainability of the business, and having regard to what could on any interpretation be regarded as narrow margins, it would have been more helpful to my analysis had updated evidence been available from the debtor as to the current state of her business.
81. I also consider it to be relevant although not determinative that Mitchell O’Brien the PIP in his affidavit of the 1st July, 2016 at para. 16 makes the following averment with regard to a submission made under s. 98 (1) regarding the retention of the non principal private residence:-
“The submission that the KBC mortgage was to be paid by unemployed/pensioner parents was not something the debtor would consent to despite numerous discussions between the PIP and the debtor in this matter.”
82. Mr. O’Brien is an experienced PIP, and was obliged by statute to put before the meeting of creditors an arrangement which he believed was sustainable. This averment perhaps reflects a view that an alternative proposal might have been more acceptable to creditors, albeit that the PIP is by virtue of his statutory role to be assumed to be taking the position that the proposed arrangement is sustainable and provides a better return for creditors.
Decision
83. I consider that the application must fail for a number of reasons relating to the financial circumstances of the debtor and the elements of the proposed PIA.
84. The financial basis on which it is made is not clear to me, and too many elements of uncertainty and conjecture exist for me to take a view that the arrangement is genuinely sustainable in the manner suggested.
85. I am also not satisfied that all of the means of the debtor have been brought into account in the formulation of the proposed PIA. That such bringing to account is an essential requirement of the legislation is clear from s.115A(9)(b)(ii)
86. I accept taken alone that the return from the sale of the principal private residence of the debtor should she become bankrupt and should the creditor remain out of bankruptcy and rely on its security, might be less than that which is to be achieved in the proposed PIA, but that fact alone is not determinative of the question of the sustainability of the proposal, whether all assets of the debtor are brought to bear, or more importantly whether the proposed PIA is unfairly prejudicial to a creditor or group of creditors.
87. I consider that it is unfairly prejudicial to the objecting creditors that the non core asset, the domestic premises in which the parents of the debtor resided should be retained as this is inevitably a burden on income. Because of the difficulties that I have explained with regard to the proposal, I do not consider it necessary to more fully analyse the question of unfair prejudice.
88. More importantly however I am not satisfied on the information I have that that the business of the debtor can sustain the proposed PIA as is required by s.115A(9)(b) and (c).
89. Therefore I propose dismissing the appeal.
Re: McDonnell, a debtor
[2017] IEHC 437
JUDGMENT of Ms. Justice Baker delivered on the 3rd day of July, 2017.
1. This judgment concerns the interpretation of s. 105 of the Personal Insolvency Acts 2012 – 2015 (“the Act”), the provisions relating to the means by which secured property is to be valued for the purposes of the Act.
2. This is an appeal from an order of Judge Lambe made on 20th April, 2017, by which she dismissed the application of the debtor made pursuant to s. 115A of the Act, having upheld the objection of Start Mortgages DAC (“Start”) that the Personal Insolvency Practitioner (“PIP”) had not followed the statutory procedural requirements in obtaining the valuation. This judgment is given also in the appeal of an identical order made in the interlocking application of James McDonnell, Record No. 2017 116 CA.
Material facts
3. The PIP made a proposal for a Personal Insolvency Arrangement (“PIA”) under the Act pursuant to his statutory function. Start voted against the proposed PIA, and the debtor appealed the rejection of the PIA pursuant to s. 115A of the Act. The Circuit Court dealt with the preliminary issue regarding the valuation presented by the PIP for the purposes of the PIA.
4. The Start valuation figure was €230,000 and the figure presented to the meeting of creditors was €180,000, a material and significant difference in the light of the overall debt figures.
The requirement for a valuation
5. For the purposes of the formulation of a PIA the value of a security must be ascertained as the relevant statutory provisions show:
“102.— (1) Where a secured creditor has been notified by the personal insolvency practitioner that a protective certificate has been issued in respect of the debtor the secured creditor concerned shall furnish to the personal insolvency practitioner an estimate, made in good faith, of the market value of the security and the creditor concerned may also indicate, a preference as to how, having regard to subsection (3) and sections 103 to 105 , that creditor wishes to have the security and secured debt treated under the Personal Insolvency Arrangement
(3) Subject to sections 103 to 105, the terms of a Personal Insolvency Arrangement may provide for the manner in which the security for a secured debt is to be treated which may include:
(a) the sale or any other disposition of the property or asset the subject of the security;
(b) the surrender of the security to the debtor; or
(c) the retention by the secured creditor of the security.
(4) Failure by the secured creditor to furnish valuation and the indication of preference relating to the security under subsection (1) within the period specified by the personal insolvency practitioner or such further period as may be offered by him or her shall not prevent the personal insolvency practitioner from formulating a proposal for a Personal Insolvency Arrangement.
(5) Where a Personal Insolvency Arrangement provides for the sale or other disposal of the property which is the subject of the security for a secured debt, and the realised value of that property is less than the amount due in respect of the secured debt, the balance due to the secured creditor shall abate in equal proportion to the unsecured debts covered by the Personal Insolvency Arrangement and shall be discharged with them on completion of the obligations specified in the Personal Insolvency Arrangement.
(6) Without prejudice to the generality of section 100 or subsections (1) to (3) and subject to sections 103 to 105, a Personal Insolvency Arrangement may include one or more of the following terms in relation to the secured debt:
(a) that the debtor pay interest and only part of the capital amount of the secured debt to the secured creditor for a specified period of time which shall not exceed the duration of the Personal Insolvency Arrangement;
(b) that the debtor make interest-only payments on the secured debt for a specified period of time which shall not exceed the duration of the Personal Insolvency Arrangement;
(c) that the period over which the secured debt was to be paid or the time or times at which the secured debt was to be repaid be extended by a specified period of time;
(d) that the secured debt payments due to be made by the debtor be deferred for a specified period of time which shall not exceed the duration of the Personal Insolvency Arrangement;
(e) that the basis on which the interest rate relating to the secured debt be changed to one that is fixed, variable or at a margin above or below a reference rate;
(f) that the principal sum due on the secured debt be reduced provided that the secured creditor be granted a share in the debtor’s equity in the property the subject of the security;
(g) that the principal sum due on the secured debt be reduced but subject to a condition that where the property the subject of the security is subsequently sold for an amount greater than the value attributed to that property for the purposes of the Personal Insolvency Arrangement, the secured creditor’s security will continue to cover such part of the difference between the attributed value and the amount for which the property is sold as is specified in the terms of the Personal Insolvency Arrangement;
(h) that arrears of payments existing at the inception of the Personal Insolvency Arrangement and payments falling due during a specified period thereafter be added to the principal amount due in respect of the secured debt; and
(i) that the principal sum due in respect of the secured debt be reduced to a specified amount.
6. Section 105 provides the statutory mechanism for arriving at a valuation and sets out the stages to be engaged by the parties. The valuation is binding for all purposes connected with the process of the resolution of debt. Because the Act envisages the forgiveness or scheduling of secured debt the valuation of secured assets is a central factual element in the process.
7. I quote the section in full:
“105.— (1) Subject to the provisions of this section the value of security in respect of secured debt for the purposes of this Chapter shall be the market value of the security determined by agreement between the personal insolvency practitioner, the debtor and the relevant secured creditor.
(2) Where the personal insolvency practitioner does not accept a secured creditor’s estimate of the value, if any, of the security furnished by the secured creditor under section 102, the debtor, the personal insolvency practitioner and the secured creditor shall in good faith endeavour to agree the market value for the security having regard to any matter relevant to the valuation of security, including the matters specified in subsection (5).
(3) In the absence of agreement as to the value of the security, the personal insolvency practitioner, the debtor and the relevant secured creditor shall appoint an appropriate independent expert to determine the market value for the security having regard to any matter relevant to the valuation of security, including the matters specified in subsection (5).
(4) Where the personal insolvency practitioner, the debtor and the secured creditor are unable to agree as to the independent expert to be appointed under subsection (3) the issue may be referred by any of them to the Insolvency Service which shall appoint such independent expert as it considers appropriate to determine the market value of the security concerned having regard to any matter relevant to the valuation of security, including the matters specified in subsection (5), and the valuation carried out by such expert shall be binding on the personal insolvency practitioner, the debtor and the secured creditor concerned.
(5) The matters referred to in subsections (2) to (4) as the matters specified in subsection (5) are:
(a) the type of property the subject of the security;
(b) the priority of the security;
(c) the costs of disposing of the property the subject of the security;
(d) the price at which similar property to that which is the subject of the security has been sold within the 12 months prior to the issue of the protective certificate;
(e) the date of the most recent valuation or transaction with respect to the property the subject of the security and the value attributed to the property in respect of that valuation or transaction;
(f) the value attributed to the property the subject of the security in the debtor’s accounting records (if any);
(g) the value attributed to the security in the secured creditor’s accounting records (if any);
(h) whether the market for the type of property the subject of the security is or has been subject to significant changes in conditions;
(i) data made available to the public by the Property Services Regulatory Authority pursuant to Part 12 of the Property Services (Regulation) Act 2011 and which relate to property similar to the property the subject of the security; and
(j) any relevant statistical index relating to the valuation of the same or similar types of property as the property the subject of the security.
(6) In this section “market value”—
(a) as respects property the subject of security for a secured debt, means the price which that property might reasonably be expected to fetch on a sale in the open market;
(b) as respects security for a secured debt, means the amount that might reasonably be expected to be available to discharge that secured debt, in whole or in part, following realisation of the security by the secured creditor concerned and, where permitted by the terms of the security or otherwise, after deducting all relevant costs and expenses in connection with the realisation of the security.
(7) The creditor concerned and the personal insolvency practitioner shall each pay 50 per cent of the costs of carrying out the valuation by the independent expert pursuant to subsection (3) or (4).
(8) The amount paid by the personal insolvency practitioner pursuant to subsection (7) shall be treated as an outlay for the purposes of the Personal Insolvency Arrangement.
(9) For the purposes of this section, the personal insolvency practitioner, the debtor, the secured creditor concerned and any independent expert shall be entitled to assume, in the absence of any clear evidence to the contrary, that the market value of the security which is a first charge is the lesser of—
(a) an amount equal to the market value of the property the subject of the security, or
(b) unless the nature of the security and the property concerned would make it unreasonable to do so, an amount equal to the market value of the property the subject of the security less an adjustment to that value as respects the costs and expenses which would normally be necessarily incurred by a secured creditor in the realisation of a security of a similar kind to that of the security concerned, provided that the adjustment is no greater than 10 per cent of the market value of the property the subject of the security.”
8. The Act envisages four possible stages in arriving at a valuation:
9. The “market value” is to be determined by agreement between the PIP, the debtor and the relevant secured creditor.
10. When agreement cannot be reached s. 105(2) requires the relevant parties to “in good faith endeavour to agree the market value”, and certain matters are specified in s. 105(5) to guide that exercise.
11. If agreement cannot be reached following the endeavour to do so, s. 105(3) requires the relevant parties to attempt to agree an appropriate “independent expert” to determine the market value, also in accordance with section 105(5).
12. The final stage of the process is engaged if the parties fail to agree on who is to act as independent expert, and s. 105(4) provides for reference to the Insolvency Service of Ireland (“ISI”) to appoint an independent expert.
13. The valuation before the meeting of creditors in the present case was determined by an independent expert appointed by the ISI, but Start argues that circumstances giving rise to the power to appoint the expert had not arisen.
The parties disagree as to the stage of the process that had been reached, and the debtor argues that the ISI was properly vested with the power to appoint an independent expert in the circumstances of the case.
14. Chronology
15. On 10th June, 2016, Start provided the PIP with its proof of debt and indicated that a valuation would subsequently be provided. This was done on 12th July, 2016, when a valuation figure of €230,000 was proposed. A formal valuation report was not provided, although it was clear that Start did have a written valuation.
16. In correspondence between 13th July, 2016, and 15th July, 2016, the PIP sought a copy of the written valuation report, and argues that in declining to furnish this Start was not engaging with the process in good faith as is required by the Act. In emails of 15th July, 2016, at 8.54 and at 17:15 Start said “under no circumstances will the valuation be provided”.
17. Start then proposed that the parties would seek to agree the appointment of an independent expert under s. 105(3), and offered to furnish a list of its preferred experts, or “panel”. The PIP rejected the tender of the panel list and without further reference to Start sought the appointment of an independent expert by the ISI on 18th July, 2016. The ISI appointed an expert on 20th July, 2016. A valuation report was received on 25th July, 2016, which gave a value of €180,000. That valuation was furnished to Start on 25th July, 2016, and after that, on 27th July, 2016, Start shared a copy of its written valuation.
18. The debtor argues that because it was clear to the PIP that the relevant parties were unable to agree a valuation, it was necessary and appropriate in accordance with statutory scheme for the PIP to apply to the ISI to appoint an independent expert. It is also argued that Start failed to act in good faith in refusing to share its written valuation report, and proposing that an agreed expert be appointed from its list of preferred auctioneers and estate agents.
19. The objecting creditor argues that it did fully engage with the letter and spirit of s. 105, and that circumstances have not arisen in which the power vested in the ISI to appoint an independent expert had been triggered.
Are the provisions of s. 105 mandatory or directory?
20. The first question to be determined is whether the statutory provisions are mandatory or directory.
21. The legislation is framed in language which suggests that it is mandatory for the parties to engage each step, and that ISI assistance be sought only if the prior engagement had failed to achieve either an agreed valuation or an agreed independent expert to provide such valuation.
22. On a literal reading of subsections 105(3) and (4), there being no ambiguity or lack of clarity, and giving the words their ordinary and natural meaning, the parties must engage in the four stages in seeking to come to a valuation. The section clearly envisages and requires a level of engagement between the parties at each of those stages.
23. It is not always the case that the word “shall” in a statutory provision denotes a mandatory obligation. Monaghan UDC v. Alf-a-Bet Promotions [1980] I.L.R.M 64 and State (Elm Developments Ltd) v. An Bord Pleanála [1981] I.L.R.M 108 dealt authoritatively with the question.
24. In Monaghan UDC v. Alf-a-Bet Promotions Ltd, the Supreme Court considered that words importing a necessary requirement were in general to be treated as mandatory, Griffin J at p. 73 explained :
“It is a well established rule of construction that the ordinary sense of words used in a statute or in regulations made thereunder is primarily to be adhered to; that requirements in public statutes which are for the public benefit are to be taken to be mandatory or imperative; and that provisions which on the face of them appear to be mandatory or imperative cannot without strong reason be held to be directory. In its ordinary sense shall is to be considered as mandatory or imperative.”
25. The mandatory nature of a requirement may be relaxed as Henchy J. stated at p. 69:
“In other words, what the legislature has prescribed, or allowed to be prescribed, in such circumstances as necessary should be treated by the courts as nothing short of necessary, and any deviation from the requirements must, before it can be overlooked, be shown, by the person seeking to have it excused, to be so trivial, or so technical or so peripheral, or otherwise so insubstantial that, on the principle that it is the spirit rather than the letter of the law that matters, the prescribed obligation has been substantially, and therefore adequately, complied with.”
26. This was further clarified in State (Elm Developments Ltd) v. An Bord Pleanála, where Henchy J. stated that the statutory context was essential to the correct interpretative approach, and whether the provision was a substantive element of a statutory scheme:
“Whether a provision in a statute or a statutory instrument, which on the face of it is obligatory (for example, by the use of the word ‘shall’), should be treated by the courts as truly mandatory or merely directory depends on the statutory scheme as a whole and the part played in that scheme by the provision in question. If the requirement which has not been observed may fairly be said to be an integral and indispensable part of the statutory intendment, the courts will hold it to be truly mandatory, and will not excuse a departure from it. But if, on the other hand, what is apparently a requirement is in essence merely a direction which is not of the substance of the aim and scheme of the statute, non-compliance may be excused.” (at p. 110)
Discussion
27. A number of factors suggest that s. 105 is mandatory in nature. First, the purpose of the section is to finalise a valuation which will be binding as part of a PIA. Hence, the section plays a substantive role in the aim and scheme of the legislation. Second, it is clear the legislature did not intend the ISI to micro-manage the process of valuation. It can be assumed that, as a State body, the ISI has limited resources, and its function was intended to be administrative. Third, the statutory scheme requires engagement by all relevant the parties to initiate the valuation process, and it must have been intended that they should at least attempt to find a resolution either by agreeing on a valuation or by agreeing on an independent expert before engaging the ISI. The ISI should be engaged only if all other options included in s. 105 have been exhausted.
28. Further, the preamble to the Act identifies the general purpose of the Act to achieve the rational and orderly resolution of debt by agreement. In that context an agreed valuation or one prepared by an agreed expert is a desirable element of the consensual and orderly approach on which the Act is predicated.
29. Because the scheme of the legislation envisages a consensual resolution of burdensome debt which has resulted in the insolvency of a debtor, it is understandable that while the legislation provides a means to resolve a dispute regarding the identity of an independent expert, it saw the role of the ISI as being one which was to be engaged only as a last resort if all other attempts to achieve consensus failed. The legislature intended to involve the ISI only when the parties themselves could not reach a consensus.
30. I consider for these reasons that the provisions of s. 105 are mandatory.
Excuse of non-compliance
31. I am not satisfied that I may excuse non-compliance with the mandatory requirements of the Act as the objecting creditor will suffer prejudice should I do so. The debtor relies on the judgment of Hogan J. in Re Belohn Ltd [2013] IEHC 157, in which a breach of the mandatory requirement in the Act that an examiner should consent in writing to accept an appointment was excused as it was “at most a technical” breach of a mandatory requirement, and he was prepared to excuse it as he was satisfied no prejudice was suffered.
32. There is in my view an obvious prejudice to the objecting creditor were a court to accept a valuation which is far less than the one it proposes. The valuation achieved as a result of the processes is binding on all parties.
33. The valuation ultimately achieved may or may not be correct, but the failure to observe the mandatory requirements of the valuation section has the effect that there was no truly binding valuation on which the Circuit Court could engage its jurisdiction under s. 115A in the circumstances.
Was the secured creditor obliged to furnish its written valuation report?
34. The debtor argues that the failure of the objecting creditor to furnish a written valuation is a reflection of the extent to which it failed to engage with the process of attempting to agree a valuation in good faith. She also argues that the objecting creditor acted unreasonably in failing to fully engage the process of agreeing an independent expert, and that its correspondence showed that it was prepared to agree a valuer only from its own list or panel of preferred valuers. The debtor argues in those circumstances that it was apparent to the PIP that the objecting creditor was not engaging and would not engage in good faith and that the only solution to the impasse was to seek the assistance of the ISI.
35. The Act requires the parties to endeavour to achieve an agreement regarding a valuation bona fide, that is openly, in good faith, and by using their best endeavours. The express requirement of “good faith” in s. 105(2) suggests that parties should conduct themselves in a manner which aims to achieve resolution. That language is also found in s. 102
36. This means in my view that a proffered valuation figure should be sustainable, supported by credible evidence and not a hypothetical figure proposed for negotiation purposes, or a starting point. The secured creditor should value its security in this open manner. The Act is predicated on agreement on the value of securities, and the scheme provides for a protective certificate to be in force for 70 days, as follows:
“95. (5) Subject to subsections (6) and (7) and section 113(2), a protective certificate shall be in force for a period of 70 days from the date of its issue.”
37. Because of this requirement, a secured creditor ought not to unreasonably propose a figure unless it is one that is real and capable of being accepted by all relevant parties so as to enable the process to conclude without the need to seek a court extension of the period of protection.
38. The ISI Stakeholder eBrief of May, 2017 “strongly encourages all parties involved to engage meaningfully and as quickly as possible in the valuation process in order to avoid situations in which, through failure to reach agreement, Protective Certificates have to be extended”. The eBrief has no legal force but is informative and explains the preferred approach of the ISI.
39. It is not necessary that a proposed valuation be supported by a written valuation report. If one is prepared and is requested by the other party there may be an element of lack of good faith in a continued refusal to furnish the written report when the written report will contain a description of the property, the comparators and other elements material to the valuation that could inform the approach of the other party, and may lead to a resolution of a disagreement or facilitate agreement. A reluctance to show a written report is at best unhelpful and unlikely to instil confidence in a proffered figure. A seriously made request for a valuation report should in general therefore not be refused without cause.
40. I agree therefore with the statement in the ISI eBrief May, 2017 that good practice under s. 105 requires “the sharing of available valuations already obtained by the parties”.
41. Start’s refusal to furnish the valuation documentation was in my view indicative of a lack of good faith or of a meaningful engagement in the process of agreeing the market value. I do not go so far as was urged by the debtor as to say that Start was “trying to hide their valuation” as the correspondence between the parties was open and frank, it was not overly formalistic, but its approach was not the open one required by the Act.
Agreed independent expert
42. However, the matter does not rest there.
43. Start did seek to engage the process provided at the third stage and the PIP in my view wrongly ignored its overture. The PIP failed to explain in correspondence why or even that he objected to the use of a panel valuer, and made an assumption, wrongly in my view, that Start would not move from its proposal that a valuer be appointed from its panel. Further, I do not consider that Start insisted on the use of a panel valuer, and that circumstances have not arisen which justified the engagement of the ISI under section 105(4).
44. By an email of 15th July, 2016, at 8.54, Start confirmed agreement “for an independent valuation to be carried out”, said it had a list of approved agents and offered to supply the names and contact details of agents on that list. An email sent at 11.27 by Mitchell O’Brien, the PIP, engaged primarily with the question of the refusal of Start to provide a written valuation.
45. Later that afternoon, at 17.15, Start replied saying it was agreeable to an additional valuation being provided on the basis, as identified in the Act, that the cost be shared equally.
46. Having read the correspondence, I consider that the PIP was mistaken in his characterisation. I do not consider that Start had, by its emails of 15th July, indicated it was prepared to agree an independent valuer only if he or she was from its approved panel or list of valuers. I consider that the PIP misconstrued the correspondence and that he was mandated by statute to engage with the proposal by Start that attempts be made to reach consensus on an agreed expert. I consider that the PIP moved too quickly to engage the services of the ISI, and that he ought to have counter proposed by identifying an independent expert or experts, and awaited a response before moving to the next stage.
47. I consider that it is not within the competence of the parties to ignore the statutory process of achieving a valuation, and that the stage envisaged at s. 105(3) must be engaged before the ISI is requested to appoint an expert. The PIP failed to address that third stage of the process.
The role of the ISI: scrutiny?
48. I reject the suggestion that the ISI has an obligation to satisfy itself that the parties have failed to either agree a valuation or an expert to provide such valuation, The statutory role envisaged is one akin to that often contained in an arbitration agreement where the power to nominate an expert is conferred on the president of the Law Society of Ireland, the chair of the Bar Council or other professional body. The ISI has no obligation to ask for evidence on which it should be satisfied that it statutory role has been properly engaged. It is, it seems to me, entitled to assume that a request is properly made.
49. Therefore, I reject the arguments that because the ISI nominated an independent expert in performance of its statutory role, the process is to be deemed to have arrived at a stage where the statutory power had become exercisable.
Conclusion
50. I am not satisfied that there was sufficient engagement by the PIP with the third stage and am satisfied that he moved with undue haste to the fourth stage. In those circumstances, therefore, I consider that the Circuit Court was correct in the approach taken to the valuation. The valuation was not binding on the parties and not a relevant one for the purposes of the process as it had not been achieved in accordance with the requirements of section 105.
51. I dismiss the appeal.
Re: Tinkler ( Personal Insolvency)
[2018] IEHC 682 (05 December 2018)
JUDGMENT of Mr. Justice Denis McDonald delivered on the 3rd day of December, 2018.
Introduction
1. In both of the above cases, the debtors (who are husband and wife) have brought applications pursuant to s. 115A (9) of the Personal Insolvency Act 2012 (“the 2012 Act”) (as inserted by s. 21 of the Personal Insolvency (amendment) Act 2015 (“the 2015 Act”)) seeking orders confirming the coming into effect of a proposed Personal Insolvency Arrangement (“PIA”) notwithstanding that the PIA, in both cases, has not been approved in accordance with Chapter 4 of Part 3 of the 2012 Act (as amended).
2. In each case, a creditors’ meeting took place on 27th January, 2017 to consider the respective PIAs. In the case of Mr. Noel Tinkler, 22% of creditors voted in favour of the proposal with 78% voting against. When this is broken down as between secured creditors and unsecured creditors, 42.74% of secured creditors voted in favour of the proposal whereas 57.26% voted against. In the case of the unsecured creditors, 8% voted in favour while 92% voted against.
3. However, of the secured creditors, one class, namely the principal private residence class, voted in favour of the proposal and, on this basis, it has been possible to satisfy the requirement set out in s. 115A(9)(g) of the 2012 Act (as amended). That subsection makes it a precondition of any application under s. 115A that at least one class of creditors has approved the proposal.
4. In the case of Mrs. Britt Tinkler, the percentages were slightly different, but the overall outcome was similar. In her case, 19.1% of creditors voted in favour of the proposal while 80.9% voted against. Insofar as secured creditors are concerned, 42.73% voted in favour while 57.26% voted against. In the case of unsecured creditors 100% of those creditors voted against the proposal. Again, as in the case of her husband, the principal private residence creditor voted in favour of the proposal.
Material terms of the PIA in each case
5. In each case the terms of the PIA are similar. It is unnecessary to set out all of the terms here. In the case of Mr. Noel Tinkler, the dividend payable under the PIA to unsecured non-preferential creditors will be 6.32 cents per euro. In the case of Mrs. Britt Tinkler, the dividend will be 6.15 cents.
6. In the case of the principal private residence creditor, Start Mortgages Limited (“Start”), the debt to it is secured on the family home. Although the value of the family home was agreed at €380,000 there will be no write-down of the full mortgage debt outstanding at €502, 291.87. Instead, interest only repayments will be applied to this account for the term of the PIA (which is 72 months). On the successful completion of the PIA mortgage repayments will revert to full capital and interest repayments. An interest rate of 1.25% will be applied.
7. The debtors also own property at 14 Franford Close, Enniscrone, Co. Sligo. Under the respective PIAs, the debtors will sell this property and the residual mortgage balance due to Bank of Ireland Mortgage Bank (“BOIMB”) will be treated as an unsecured debt after the proceeds of sale have been paid to BOIMB less the agreed costs of sale. BOIMB will be paid the same dividend as all of the other unsecured creditors and, on successful completion of the PIA, the balance of the unsecured debt will be written off.
8. The debtors also own commercial property known as “Tinkler’s Yard”, Main Street Rathcoole, Co. Dublin. This yard has a current market value of €350,000. Cheldon Property Finance DAC (“Cheldon”) have the benefit of a mortgage over this property which was originally granted by the debtors to Permanent TSB. Under the PIAs, the debtors will retain this commercial property for business purposes. The rental income of this property (from a number of business tenants) forms a significant part of the debtors’ overall income. The amount outstanding to Cheldon is in excess of €1,750,000. Under the PIA, the secured debt would be reduced to €350,000 with a balance of €1,430,522.11 being treated as an unsecured debt and ranking for a dividend accordingly. The term of the loan would be extended from 85 months to 252 months. The applicable rate of interest would be reduced from 6.95% to 4.5%. For the 72-month duration of the PIAs the debtors would make interest-only repayments in respect of the restructured commercial loan in the combined sum of €1,312.50 reverting to capital and interest repayments of €2,667.48 thereafter.
9. As I understand the proposal, Cheldon would receive a total of €90,344.22 by way of dividend in respect of the unsecured portion of its debt under the Noel Tinkler PIA while it would receive a further dividend of €87,911.41 under the Britt Tinkler PIA. On completion of the respective PIAs, the remaining debt of €1,252,266.48 would be written off.
10. The debtors also own a quarry site at Calligstown, Rathcoole, Co. Dublin. There are three judgment mortgages registered against that property which, together, exceed the current market value of the property at €165,000. Under the PIA, the debtors will retain this site as it is their place of work. At retirement age, the debtors will sell this property, at which stage the judgment mortgage debts secured on it will be discharged in full.
The Notice of Objection
11. Cheldon has filed a notice of objection in both cases. The grounds of objection in both cases are the same. While there were a large number of grounds set out in the notice of objection in each case, there were essentially three grounds relied upon by Cheldon at the hearing, namely:-
(a) concern was expressed about the treatment of Revenue debt in the PIAs which it was suggested would have unintended consequences for unsecured creditors given that part of the Revenue debt has preferential status;
(b) Cheldon argued that the proposed PIA in each case is not fair and equitable in relation to each class of creditor that has not approved the proposal and whose interests or claims would be impaired by its coming into effect;
(c) the proposed PIA in each case is alleged to be unfairly prejudicial to the interests of Cheldon.
The hearing
12. The hearing of the application under s.115A together with Cheldon’s objections took place over the course of two days namely on 23rd July, 2018 and on 8th October, 2018. Very helpful and detailed submissions were made by counsel on behalf of the Personal Insolvency Practitioner (“the practitioner”) and on behalf of Cheldon. The submissions addressed each of the three grounds of objection summarised in para. 11 above.
13. I now consider, in turn, each of these grounds of objection.
The position of the Revenue
14. The Revenue Commissioners were not represented at the hearing. However, counsel for Cheldon emphasised that s. 115A confers a far-reaching power on the Court. He argued that this places a significant onus upon the practitioner to satisfy the Court that all of the relevant statutory conditions are met. Counsel submitted that there were a number of issues of concern in relation to the way in which the Revenue Commissioners were dealt with in this case, namely:-
(a) in the first place, in s. 5 of the PIA in each case, it is stated that there are no ” permitted debts ” and no ” preferential debts ” and that the PIA does not include any ” excludable debts “. This is relevant in the context of s. 115A(8)(iii) which requires that, on an application under s. 115A the Court must be satisfied that the proposed PIA does not contain any terms that would release the debtor from ( inter alia ) an excludable debt (other than a permitted debt). For this purpose, s. 2 of the 2012 Act defines an excludable debt as including a liability of a debtor in respect of taxes. Thus, amounts due to the Revenue would fall within the ambit of an ” excludable debt “. S. 92(1) makes clear that such a debt can be included in a proposal for a PIA only where the creditor (in this case the Revenue) has consented to the inclusion of that debt in the PIA. Where such consent is given, s. 92(a) provides that the debt in question will then be regarded as a ” permitted debt”.
(b) in the case of Mr. Noel Tinkler, the statements made in s. 5 of the PIA (as summarised in subpara. (a) above) are incorrect. It is clear that the PIA does in fact include debts in that it shows a total of €261,599.20 due to the Revenue of which €145,940.56 is to be repaid to Revenue on sale of the Calligstown property on the retirement of Mr. Tinkler. The statements of s. 5 of the report are therefore manifestly incorrect. As noted by me in para. 63 of my judgment in Donal Taffe [2018] IEHC 468, there is no mechanism under the 2012 Act to correct an error of this kind in a PIA. Where an error is inconsequential, it is possible, in the order of the Court confirming the PIA to note that the error exists and to set out the correct position in the order. It is open to question whether the error in s. 5 of the Noel Tinkler PIA could be said to be inconsequential. However, when the PIA is read as a whole, I believe it would readily be seen by any creditor that s. 5 could not possibly be correct given the detailed information which is given in s. 12 of the PIA dealing with the position of creditors including the Revenue. However, the creditors might not have been aware that any aspect of the Revenue debt was preferential. Section 12 of the PIA simply identifies how much of the Revenue debt is secured and how much of it is unsecured. Section 25.5 of the PIA provides that where Revenue debt has a preferential status this will be specified in Part IV. I can see nothing in Part IV of the PIA in Mr. Tinkler’s case which identifies that any part of the Revenue debt is preferential. On the contrary, there is a statement in s. 5 (which is contained in Part IV) that there is no preferential debt. Furthermore, s. 3 of Part IV simply records the amount that will be paid to Revenue on foot of its secured debt together with the small dividend to be paid in respect of the unsecured balance.
(c) Counsel for Cheldon also raised an issue as to whether the Revenue Commissioners had in fact opted into the PIA process in this case such as to make the “exc ludable debt ” due to them a ” permitted debt ” for the purposes of the PIA. If it was not a permitted debt, this would raise an issue as to whether s. 115A(8)(a)(iii) of the 2012 Act had been complied with. In order for an excludable debt to become a permitted debt, the creditor concerned (in this case the Revenue) must consent or be deemed to consent under s. 92 to the inclusion of the debt in the proposal for a PIA. In this context, my attention was drawn by counsel for the practitioner to the proof of debt form which was submitted by the Revenue Commissioners in this case which shows the total amount of the Revenue claim to be €261,559.20 of which €249,046.51 is secured by the judgment mortgage on the Calligstown property. It also shows that €78,957.27 is a preferential debt. In the table attached to the proof of debt, one can see that the entire of the preferential debt is secured by that judgment mortgage. My attention was also drawn to an email of 11 January 2017 furnished by the Insolvency Unit of the Revenue Commissioners in which the Revenue advised the practitioner that: –
“Revenue opts in to the Personal Insolvency Arrangement . . . proposed on the 9th January 2017.
Please find attached a proof of debt listing all the outstanding amounts to be as Revenue’s specified debt in the PIA.”
In these circumstances, it appears to be clear that the Revenue debt is covered by s. 92 of the 2012 Act and is accordingly a “permitted debt”. In those circumstances, there would not appear to me to be any danger that the provisions of s. 115A (8)(a)(iii) have not been complied with.
(d) However, a further point was made by counsel for Cheldon that there is no evidence in writing that Revenue have agreed that the preferential debt due of €78,957.27 will not be paid in priority. S.101(1) of the 2012 Act is very relevant here. It provides as follows: –
“Unless the creditor concerned otherwise agrees in writing and provision is so made in the terms of the [PIA], a preferential debt shall, subject to subsection (3), be paid in priority by the debtor . . ..”
S.101(3) is not relevant here, since it only applies where a creditor fails to satisfy the practitioner that the debt in question is a preferential debt. There was no suggestion in the hearing before me that the practitioner here was not satisfied that €78,957.27 is preferential. Counsel for Cheldon made the simple point that, for s. 101(1) to be disapplied, there must be consent in writing from the creditor concerned (in this case the Revenue) and specific provision to that effect must also be made in the PIA. In this case, it is implicit in the PIA that no part of the Revenue debt will be paid in priority to other debts. On the contrary, it is envisaged that €145,940.56 will be paid out of the proceeds of sale of the Calligstown site (but this will not take place until the retirement of Mr. Tinkler) while the Revenue will receive no more than €7,301.86 by way of dividend in respect of the balance of its debt of €115,658.64. However, counsel makes the point that, absent consent in writing from the Revenue Commissioners, s. 101(1) nonetheless applies and accordingly the Revenue Commissioners would be entitled, as a matter of law, to enforce the preferential element of the debt at the expense of the other creditors. In response, counsel for the practitioner argued that this would have no more than a marginal impact on the creditors reducing the anticipated dividend from 6.32% to approximately 6%. He argued that the PIA could therefore still be performed even if the Revenue were to proceed in that way. He also submitted that it was unlikely that Revenue would proceed in that way, given that Revenue did not appear at the hearing to oppose the application under s. 115A. He drew attention to an email from the Insolvency Unit of Revenue of 27 January 2017 in which Revenue had indicated that it would not be voting in favour of the proposal. However, these points on behalf of the practitioner are undermined by the fact that the Revenue proof of debt refers very clearly to the preferential element of the debt such that there can be no guarantee that the Revenue Commissioners will not wish to rely on their rights under s. 101(1). The proof of debt form also makes it difficult to understand how the preferential debt was overlooked in the PIA.
15. In my view, it is unsatisfactory that a PIA should be presented to creditors and voted upon by creditors in circumstances where the PIA does not expressly identify the preferential element of the debt due to Revenue. Not only is this inconsistent with s. 25.5 of the PIA but it is manifestly wrong that creditors should be asked to vote upon a PIA without any explanation as to how the preferential element of the debt to Revenue is to be dealt with. Furthermore, in my view, counsel for Cheldon was correct insofar as he suggested that, absent a written consent from Revenue, s. 101(1) continues to apply and that it would therefore be open to Revenue, notwithstanding the existence of the PIA, to enforce its right to be paid in priority in respect of the preferential debt of €78,957.27.
16. If this were the only issue to be considered, I would adjourn my consideration of the matter and require the practitioner to provide a full explanation on affidavit as to how this occurred. However, this is not the only issue that falls to be considered. The delivery of such an affidavit would serve no useful purpose if it transpires that Cheldon is to succeed on one of its remaining grounds of objection raised by Cheldon, namely: –
(a) Whether the proposed PIA is fair and equitable in relation to each class of creditors that has not approved the proposal;
and;
(b) Whether the proposed PIA is unfairly prejudicial to the interests of Cheldon.
Is the proposed PIA fair and equitable in relation to each class of creditor?
17. Under s. 115A(9)(e), the court must be satisfied (if it is to confirm the coming into effect of the proposed PIA) that the PIA is: –
“Fair and equitable in relation to each class of creditors that has not approved the proposal and whose interests or claims would be impaired by its coming into effect.”
18. For the purposes of this issue, counsel for Cheldon argued that Start and Cheldon are in different classes and that the proposed PIA is not fair and equitable as between those classes.
19. The judgment of Baker J. in Sabrina Douglas [2017] IEHC 785 provides considerable guidance as to the constitution of classes for this purpose. As Baker J. observes in para. 27 of her judgment, the governing criterion is contained in s.115A(17)(a)(ii) under which the court is to have regard to whether the creditors: –
” . . have, in relation to the debtor, interests or claims of a similar nature”
20. In Sabrina Douglas, Baker J. referred to the decision of Laffoy J. in Re: Millstream Recycling Ltd [2010] 4 IR 253 where Laffoy J. (in the context of the constitution of classes for the purposes of a scheme of arrangement under s. 201 of the Companies Act 1963) applied the classic test laid down in Sovereign Life Assurance Company v. Dodd [1892] 2 QB 573 where Bowen L.J. said: –
“The word ‘class’ used in the statute is vague, and to find out what it means we must look at the general scope of the section, which enables the Court to order a meeting of a ‘class of creditors’ to be summoned. It seems plain that we must give such a meaning to the term ‘class’ as will prevent the section being so worked as to produce confiscation and injustice, and that we must confine its meaning to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.”
21. That test has been consistently applied by the courts ever since. In the Millstream case, Laffoy J. also referred to the observation by Chadwick L.J. in Re: Hawk Insurance Co. Ltd. [2001] BCLC 480. Laffoy J. at p. 277 summarised the approach proposed by Chadwick L.J. in that case as follows: –
“are the rights of those who are affected by the scheme proposed such that the scheme can be seen as a single arrangement; or ought to be regarded, on a true analysis, as a number of linked arrangements? . . . it is necessary to ensure not only that those whose rights really are so dissimilar that they cannot consult together with a view to a common interest should be treated as parties to distinct arrangements and have their own separate meetings, but also that those whose rights are sufficiently similar to the rights of others that they can properly consult together should be required to do so. . ..”
22. Each of the decisions in Sovereign Life Assurance Co. v. Dodd , Re: Hawk Insurance Co Ltd ., and Re: Millstream Recycling Ltd were concerned with whether class meetings were properly constituted for the purposes of voting on a scheme of arrangement. That is not the issue here. However, the approach taken in those cases is nonetheless of significant assistance in deciding whether, for the purposes of the application under s. 115A, Start Mortgages and Cheldon should be considered to be in separate classes of creditors. In Sabrina Douglas , Baker J. held that the principal private residence creditor in that case was in a different class to the secured creditors. She arrived at that conclusion applying the approach taken by Laffoy J. in the Millstream Recycling case. In particular, she drew attention to which the 2012 Act (as amended in 2015) gives special protection for the principal private residence of a debtor. In my view, applying the approach taken by Laffoy J. in Millstream Recycling , Start and Cheldon should be treated as different classes for present purposes. Their rights under the proposed PIA are quite different. In truth, the scheme is not a single arrangement which treats all secured creditors in the same way; instead it is, on a true analysis, a number of linked arrangements, insofar as the secured creditors are concerned. In particular, Start is dealt with quite separately and distinctly under the scheme from the way in which the position of Cheldon is addressed.
23. In contrast to Cheldon, Start does not suffer any write down of the indebtedness secured on the family home of Mr. and Mrs. Tinkler. In the case of both Start and Cheldon, the underlying security is worth less than the amount of the secured debt. In the case of Start, the current market value of the family home of Mr. and Mrs. Tinkler is €380,000. This leaves a deficit of €122,292.00. The proposed PIA does not involve any write down of that deficit. Nor does it envisage that Start will be paid only a dividend in respect of that element of the debt.
24. In the case of Cheldon, the indebtedness is €1,780,522.11. The value of the underlying security is €350,000. Under the proposed PIA, the balance of €1,430,522.11 will fall to be dealt with as an unsecured debt resulting in a dividend payment at a rate of 6.32% (or a rate of 6% in the event that the Revenue exercise their priority right in respect of the preferential debt).
25. In the circumstances described in paras. 23-24 above, I find it impossible to understand how Cheldon and Start could, to paraphrase Bowen L.J. consult together with a view to their common interest. Under the proposed PIA, their respective rights are simply too dissimilar. There is an obvious incentive for Start to vote in favour of the PIA. If the PIA succeeds, Start will achieve a much better result under the PIA than it would in the event of bankruptcy. Under the PIA, Start will ultimately get paid in full. In a bankruptcy, Start would have to compete with the other creditors of the debtors in relation to the extent of the indebtedness over and above the value of their security.
26. In contrast, there is no such incentive available to Cheldon. Its rights are different under the proposed PIA. It will simply receive a dividend in respect of the element of the debt which exceeds the value of the underlying security.
27. Given the dissimilar ways in which Start Mortgages on the one hand and Cheldon on the other are addressed in the proposed PIA, I believe the PIA is better characterised as a series of interlinked compromises or agreements – there is one form of agreement with Start and another with Cheldon. In all of these circumstances I have come to the conclusion that Start and Cheldon are not to be treated as being in the same class for the purposes of this application under s. 115A. For completeness, I should add that, although BOIMB was not represented at the hearing, it appears to me that its rights under the proposals are also quite different to the rights of either Cheldon or Start, such that the arrangement with it should be treated as separate to that with either Cheldon or Start. In para. 7 above, I have summarised the way in which the BOIMB debt is to be addressed under the proposals. The manner in which it is to be dealt with is markedly different from the way in which the proposals treat either Cheldon or Start. It will be able to realise its security under the proposals, such that it is impossible to see how it could plausibly be suggested that it could consult together with Start and Cheldon or either of them in the manner envisaged in the Sovereign Life case. The true position is that each of the three is being pulled in different directions given the very different ways in which each is treated under the proposals.
28. Having decided that Start and Cheldon should each be classified as a separate class of creditor, the next question to be considered is whether the proposed PIA is unfair and inequitable as between Cheldon on the one hand and Start on the other. In this context, as counsel for Cheldon has very properly acknowledged, there are circumstances where classes of creditors can be treated differently without unfairness. For example, in the context of a scheme of arrangement formulated under the Companies (Amendment) Act 1990, McCracken J. in Re: Antigen Holdings Ltd . [2001] 4 IR 600 had to consider whether it was unfair that trade creditors of the company in examinership were treated more favourably then banking creditors. In that case, the banking creditors were to be paid in full but without interest. However, the banking creditors were subject to a longer repayment period than trade creditors. McCracken J. had to consider whether this was unfair. He came to the conclusion, that, notwithstanding the difference in treatment, it was not unfair. He said at p. 603: –
“It has to be said that no creditors are getting paid interest. The banks’ debt . . .. is by far the largest proportion of the debts owed to the creditors and they undoubtedly are not being treated in the same way as the ordinary creditors. They are being paid off over a longer period and there is some validity in their point that interest to a bank is the equivalent to the profit made by an ordinary trade creditor on selling his goods and the trade creditors are in fact getting paid that profit. However, the question is: is this unfair?
The purpose of the scheme is to ensure the viability of the company. This can only be done if there is a reasonable time span in which to discharge the debt and if there is an amount being paid which is within the capacity of the company to pay. Now the vast bulk of remaining creditors are trade creditors who are presumably going to continue trading with the company. I do not think it is unfair they should get some priority because they are going to keep the company going.”
29. It will be seen that in the Antigen case, there was an objective justification for the difference in treatment between trade creditors and banking creditors. As McCracken J. said, the trade creditors were entitled to get some priority in that case because they were going to keep the company going.
30. In the present case, it is therefore necessary to consider whether there is some objective justification for the difference in treatment between Cheldon and Start. In this context, it must be acknowledged that, as counsel for the practitioner has argued, s. 100(3) of the 2012 Act implicitly acknowledges that creditors in different classes can be treated differently. While s.100(3) expressly envisages that creditors within the same class must be treated on a pari passu basis, there is no statutory requirement that the pari passu rule applies as between classes. Nonetheless, s. 115A(9)(e) requires that the Court must be satisfied that the proposed PIA is fair and equitable in relation to each class of creditors that has not approved the proposal and whose interests would be impaired by the PIA. In the present case, Cheldon has not approved the proposal. Furthermore, it is clear that its interests will be impaired by the PIA since it will be prevented from enforcing its security over the Tinkler’s Yard property and will suffer a write down of the secured indebtedness. In these circumstances, if the court is to approve the PIA pursuant to s. 115A, the Court must be satisfied that there is some objective justification for the difference in treatment.
31. In his affidavit sworn on 6 July 2017, the practitioner seeks to justify the difference in treatment in the following terms in para. 15-17 of his affidavit: –
“15. . . I say that . . . it is clear that there is both a justifiable and legal reason why the two creditors are treated differently under the PIA proposal. However, the said different treatment is not what one would describe as a prejudice or an unfair prejudice in the circumstances.
16. I say that there is a justifiable reason for the keeping and retention of the family and family home debt as opposed to the more variable and vulnerable commercial debt. I say that the commercial debt has been restructured but remains profitable for the creditor and represents a far greater return than bankruptcy. I say that the PIA is in reality contingent on the working life of the debtor to fund any payment and thus there must be a certain degree of reality in all of the restructuring.
17. . . . I say that it may be the case that the debtor’s income is generated from rental income from the objector’s security, however in the circumstances it is clear that the PIA both generates an income for the objecting creditor, a dividend for the objecting creditor, a better return than bankruptcy . . . and enables the debtors to retain their family home as per the objectives of the Act
18. For the avoidance of any doubt, I say and believe that there is no unfair or inequitable treatment of creditors but rather proper compliance with the Act and the realities of both personal insolvency practice and what would occur under the bankruptcy regime.”
32. Essentially, what the practitioner appears to suggest in those paragraphs is that Start is entitled to preferential treatment because it holds security over the principal private residence of the debtors. It is certainly true that the 2012 Act (as amended) includes a number of provisions which display a clear legislative intention to protect the principal private residence. Thus, for example, s. 99(2)(h) expressly provides that a PIA shall not require that a debtor dispose of his or her interest in the debtor’s principal private residence or to cease to occupy such residence unless the provisions of s. 104(3) applies. This is reinforced by s. 104(1) which makes clear that, in formulating a proposal for a PIA, a practitioner must, insofar as reasonably practicable, formulate the proposal on terms that will not require the debtor to dispose of an interest in or to cease to occupy his or her principal private residence. The only exception to this is under s. 104(3) where the debtor confirms in writing to the practitioner that he or she does not wish to remain in occupation of the residence or where the practitioner, having discussed the issue with the debtor, has formed the opinion that the costs of continuing to reside in the residence are disproportionately large.
33. The intention to preserve the principal private residence is further reinforced by the provisions of s. 115A itself which permits the Court (subject to being satisfied that each of the conditions stated in s. 115A have been complied with) to confirm a proposal for a PIA even where it has not been approved by a majority of the creditors
34. On the other hand, there is nothing in the 2012 Act (as amended) which suggests that the holders of security over a principal private residence should be treated more favourably than other secured creditors. In particular, there is nothing in s. 102 of the 2012 Act (which deals with the manner in which secured debts should be addressed in a PIA) which suggests that the holder of security over the residence should be treated more favourably than those holding security over other assets. Similarly, there is nothing in s.103 or s.105 (which also deal with the position of secured creditors) which suggests that the holder of security over the residence is entitled to any more favourable treatment than any other secured creditors. What the Act envisages is that the residence, the subject matter of the security held by the principal private residence lender, will not be sold (save in the very limited circumstances outlined in the Act). However, the value of the security held by such a creditor still falls to be assessed in accordance with s. 105(1) of the 2012 Act – namely the market value of the security. In the event that the PIA did not proceed, that is what the holder of security could realise through a forced or consensual sale of the residence. That is precisely the same as the holder of security over any other property could expect to receive on a sale.
35. In those circumstance, it is very difficult to understand the justification for the treatment of the Start debt in this case. As noted above, under the terms of the proposed PIA, Start will receive payment not merely of the value of the residence (which has been agreed at €380,000) but it will also receive payment of the balance of €1,222,292.00 albeit over a significantly extended term. Prior to the proposal for the PIA, the remaining term was 105 months. Under the PIA this will be extended to 252 months. In addition, for the duration of the PIA, interest only will be paid at a reduced rate of 1.25%. While that rate appears to be significantly lower than a market rate, the proposal is that on completion of the PIA, all mortgage arrears will be capitalised. This means that they will be treated as principal. Furthermore, on completion of the PIA, the payments will revert to full capital and interest repayments. Thus, in circumstances where the arrears will be capitalised, the interest in the 180-month period subsequent to the PIA will be charged on this capitalised sum rather than on the existing principal. Of course, as counsel for the practitioner correctly argued, Start is itself adversely affected by the terms of the proposed PIA. The interest rate is to be reduced for the duration of the PIA, no payments of principal are to be made during the currency of the PIA, and the repayment period is to be significantly extended. However, even allowing for these factors, it seems to me to be clear that Start is treated significantly more favourably under the PIA than Cheldon. In contrast to Start, the secured indebtedness in Cheldon’s case will be reduced to the current market value of the Tinler’s Yard property namely €350,000. The balance of €1,430,522.11 will be treated as unsecured and Cheldon will be confined to a dividend of somewhere between 6% – 6.3% (depending upon whether or not Revenue exercise their rights under s. 101(1) of the 2012 Act). That seems to me to be manifestly less favourable than the treatment of the Start debt. I can see no justification for this disparity in treatment on the basis of anything said by the practitioner in paras. 15-17 of his affidavit sworn on 6th July 2017. Furthermore, as outlined in more detail below, the further justification offered by the practitioner (in a later affidavit) for the disparity in treatment gives cause for concern,
36. In this context, it should be noted that Mr. John Burke of Cheldon swore an affidavit on 7 June 2018 in which he responded to the practitioner’s affidavit. In para. 17 of this affidavit, Mr. Burke said: –
“17. It is not contended, nor could it be, that the preferential treatment of the Start debt is necessary to ensure that the Debtors continued to reside in their principal private residence. It would clearly have been open to the PIP to formulate a PIA under which the Debtors retained their principal private residence but with a reduction in debt owed to Start. Thus I do not accept that the differential treatment of two similarly situated creditors can be justified in the manner contended for by the PIP”.
37. In turn, this contention on the part of Mr. Burke was addressed in a subsequent affidavit sworn by the practitioner on 19 June 2018 in which he said, in para 26: –
“26. I say in particular response to para. 17 of the objector’s Affidavit . . . Start Mortgages engaged pursuant to s. 98 and s. 102 with my offices and submitted a counterproposal that they would accept. I say and I took it that they would not accept anything beyond this and in circumstances where the PIA is predicated on the retention of the family home and where the s. 115 A application is predicated on the principal private residence class of creditors it therefore was necessary to obtain the support of Start Mortgages”.
38. I have to say that I am deeply troubled by this averment on the part of the practitioner. It clearly suggests that the practitioner considered it necessary to offer favourable terms to Start in order to obtain its support for a proposed PIA. In my view, such an approach is manifestly at odds with the requirement that there should be fair and equitable treatment of different classes of creditors. It is also impossible to reconcile this statement with earlier averments made by the practitioner on affidavit. For example, in para. 5 of his affidavit sworn on 22 February 2017, grounding the application under s. 115A, he expressly stated: –
“5. For the record, I say that I am an independent Personal Insolvency Practitioner . . .and as such, whilst I stand over the . . .PIA . . .I do same whilst . . . balancing the interests of each specified creditor and the Debtor . ..”
39. It also seems to me to be at variance with what is said by the practitioner in para. 14 of his affidavit sworn on 6 July 2017 in which he said: –
“14. . . I say that . . . I therefore drafted the PIA proposal ‘in the dark’ to the best of my abilities and with a view to ensuring a return to solvency, the retention of the family home and a fair and equal treatment of all creditors.” (emphasis added)
40. In my view, the approach set out in para. 5 of his first affidavit and para. 14 of his second affidavit, very correctly identifies the approach which a practitioner should take in formulating proposals for a PIA. I cannot see any proper basis on which a practitioner could formulate proposals favourable to a particular creditor with a view to securing the approval of that creditor to the proposal. If proposals for a PIA were to be formulated on that basis, it would inevitably distort and fundamentally undermine the ability of a PIA to operate fairly and equitably in relation to each class of creditors and to ensure that the PIA is not unfairly prejudicial to the interests of any interested party.
41. The practitioner makes the point in his affidavits that, in contrast to Start, Cheldon did not engage with him pursuant to s. 98 and s. 102. Cheldon did not respond to the notice under s. 98. At this point, I should explain that under s. 98(1) of the 2012 Act, the practitioner is required, as soon as practicable after a protective certificate has been issued, to give written notice to the creditors of the debtor that the practitioner has been appointed for the purposes of making a proposal for a PIA and he or she is required to invite creditors to make submissions regarding the debts concerned and the manner in which the debts might be dealt with as part of a PIA. The practitioner is also required to consider any submissions made by creditors including any submission made by a secured creditor under s. 102.
42. S. 102(1) imposes an obligation on a secured creditor, following receipt of the notification under s. 98, to furnish to the practitioner an estimate, made in good faith, of the market value of the securities. In addition, s. 102(1) envisages that the secured creditor may also indicate, a preference as to how that creditor wishes to have the security and the secured debt treated under the PIA. In turn, s. 102(2) provides that the practitioner, in formulating the proposal for a PIA, is to have regard to any preference indicated by the secured creditor under s. 102(2) as to the manner in which the security and the secured debt should be dealt with. This is subject, however, to the qualification that this is ” to the extent [that the practitioner] considers it reasonable to do so” . That very clearly indicates that the practitioner is required to form his own view on the preference suggested by the secured creditor. It does not authorise the practitioner to accept whatever is put forward by the secured creditor without scrutiny or evaluation by the practitioner. One further feature of the statutory scheme to be borne in mind is that, as 102(4) makes clear, a failure by a secured creditor to furnish a valuation and an indication of preference will not operate to prevent the practitioner from formulating a proposal for a PIA.
43. The provisions discussed in paras. 41-42 above clearly envisage that a secured creditor will respond to the notice from the practitioner. While it is not mandatory for a secured creditor to indicate any preference as to how the secured debt should be dealt with, it is highly desirable that a secured creditor should indicate a preference so that the practitioner will not have to approach the matter “in the dark” to paraphrase what was said by the practitioner in his affidavit evidence before the Court. In this case, it is regrettable that Cheldon did not respond in any way to the notification sent by the practitioner under s. 98. That undoubtedly placed the practitioner at a significant disadvantage. In contrast, as the practitioner explains in his affidavits, Start engaged and submitted a counterproposal. In para. 26 of his final affidavit, the practitioner says that he: – “took it that they would not accept anything beyond this “. This appears to suggest that the manner in which the Start debt is proposed to be addressed in the PIA is derived from the Start counterproposal.
44. I accept that the practitioner was placed in a difficult situation in circumstances where he received no communication from Cheldon. However, I can see no basis on which the failure of Cheldon to respond could in any way relieve the practitioner from the obligation to formulate a proposal for a PIA that was fair and equitable as between all classes of creditors. In addition, I do not believe that the failure of Cheldon to respond can in any way justify the decision of the practitioner (as frankly acknowledged in para. 26 of his final affidavit) to agree to the favourable treatment accorded to Start in order to obtain their support for a proposed PIA. Whether or not a response was received from Cheldon, there was, in my view, an obligation on the practitioner to formulate proposals for a PIA which were fair and equitable as between the different classes of creditors. The failure to respond did not give the practitioner carte blanche to formulate proposals for a scheme of arrangement which included such a disparity of treatment as between Start Mortgages and Cheldon. On the contrary, the obligation remained, as stated above, to formulate proposals which involved the fair and equitable treatment of the classes. I fully accept that did not require identical treatment as between Start and Cheldon. I do not rule out the possibility that it might be possible to justify a level of disparity of treatment. The difficulty in the present case is that I can see no justification for the disparity in treatment here. In my view, the desire to win the support of an individual secured creditor (even where that secured creditor holds security over a principal private residence) cannot justify the disparity in treatment.
45. It is true that, of course, a practitioner, when formulating proposals, must have in mind that any proposed PIA must have a reasonable prospect of appealing to creditors. It would be foolhardy for a practitioner to seek to formulate proposals which did not have any prospect of success. However, that does not, in my view, entitle a practitioner to single out one creditor or one class of creditors for particularly favourable treatment in order to secure the support of that creditor or class of creditors for a particular proposal. On the contrary, the obligation is always to formulate proposals which are fair and do not give rise to manifestly inequitable treatment as between different classes. The usual way in which to persuade creditors to vote in favour of proposals is to demonstrate that the proposals will achieve for the creditors a more favourable outcome than is likely to be achieved in a bankruptcy. If proposals are formulated with that object in mind, there is unlikely to be any basis on which a creditor can show that it has been unfairly treated or unfairly prejudiced by the proposals. On the other hand, if practitioners were to formulate proposals aimed at securing the support of particular creditors or particular classes of creditors, this is a recipe for unfairness and will inevitably give rise to objections which will add enormously to the length and expense of the process and put the confirmation of the proposals in jeopardy.
46. I have therefore come to the conclusion that the proposals for a PIA which have been formulated in these interlocking cases, are not fair and equitable in relation to Cheldon (when compared with the proposals insofar as they affect Start). In those circumstances, the requirement set out in s. 115A(9)(e) of the 2012 Act (as amended) cannot be satisfied. It necessarily follows that an order cannot be made confirming the coming into effect of the proposed PIA.
Unfair prejudice
47. Lest I am wrong in the conclusion which I have reached in relation to s. 115A(9)(e) I will, for completeness, also consider the case made by Cheldon by reference to s. 115A(9)(f) under which the Court cannot make an order confirming proposals for a PIA if the proposed arrangement is unfairly prejudicial to the interests of any interested party. It is clear that the proposed PIA here is prejudicial to the interests of Cheldon in circumstances where its secured debt is being written down to the value of the underlying securities and where Cheldon will receive only a dividend of between 6% and 6.3% in respect of the balance of the sum due to it. The question is whether that prejudice is unfair in all of the circumstances.
48. Unfair prejudice is not defined in the 2012 Act (as amended). Nor is it defined in the equivalent provisions in the Companies Act 2014 dealing with examinerships. However, significant guidance as to the meaning of ” unfair prejudice ” was given by the Supreme Court in the context of examinerships in Re: McInerney Homes Ltd . [2011] IESC 31 where O’Donnell J. said at paras. 29 – 30: –
“It might be said that the Act contemplates necessary prejudice to creditors, and only prohibits prejudice which is unfair. However, it may be more correct to conceive of any scheme as being prejudicial since it requires a creditor to accept a lesser amount than is, in theory, his or her legal entitlement. For example, in this case the scheme was prejudicial in that it required creditors to accept a written down amount for their debt. But it was said to be unfairly prejudicial because that was less than the banks could obtain on a receivership. The question in any particular case is whether that particular prejudice is “unfair”. The essential flexibility of the test appears deliberate. It is very unlikely that a comprehensive definition of the circumstances of when a proposal would be unfair could be attempted, or indeed would be wise. The fact that any proposed scheme must receive the approval of the Court means that there will be a hearing. The Act . . . appears to invite a court to exercise its general sense of whether, in the round, any particular proposal is unfair or unfairly prejudicial to any interested party, subject to the significant qualification that the test is posed in the negative: the Court cannot confirm the scheme unless it is satisfied the proposals are not unfairly prejudicial to any interested party.
In this case, the trial judge’s approach to the question was to view the scheme against the likely return to affected creditors under the likely alternative in the event that there was no examinership, and no successful scheme. I agree that that is a vital test. Furthermore, as the trial judge recognised, there may well be circumstances where a creditor may be required to accept less than would be obtained in such circumstances on . . . a receivership, but those circumstances would normally require weighty justification. However, as this case illustrates, there may remain considerable difficulty in determining the value which a creditor, and in particular a secured creditor, might otherwise obtain, by reference to which the proposal can be judged.”
49. The decision of the Supreme Court in Re: SIAC Construction Ltd . [2014] IESC 25 is also relevant. In that case, Fennelly J. said at para. 69: –
“There are two aspects to the notion of unfairly prejudice. The underlying assumption is that the person in question is, to begin with, prejudiced, that is to say that his interests as a creditor . . . are adversely affected or impaired by the proposals. It is the inevitable consequence of the insolvency . . . that every creditor will, in that sense, suffer prejudice no matter what proposals are put forward. But prejudice is not enough to trigger the court’s obligation to refuse to confirm the proposals. It must in addition be unfair. Unfairness, in turn comprises two essential aspects, the general notion of injustice and the more specific one of unequal treatment.”
50. It is clear from the observations of O’Donnell J. that the concept of ” unfair prejudice ” is a flexible one and that, in assessing whether any prejudice is unfair, the concept of fairness should be considered in the round. It is also clear from the observations of Fennelly J. in the SIAC case, that the concept of unfairness is not confined to cases where a creditor will fare worse in an examinership (or in this case a PIA) as compared to a receivership or a bankruptcy. Inequality of treatment is also a facet of unfairness.
51. Counsel for Cheldon submitted that Cheldon will be worse off under the PIA than it would be in the event of a bankruptcy. In the event of a bankruptcy, Cheldon would be entitled to rely upon its security and remain outside the bankruptcy. It would therefore be entitled, for example, to appoint a reciever over the rents currently paid by the tenants of the debtors at Tinkler’s Yard. Under the terms of the PIA, the debtors would make interest only repayments in respect of the Cheldon loan in the sum of €1,312.50 per month for the 72 month duration of the PIA, reverting to capital and interest repayments of €2,667.48 for the remaining 150 months of the extended mortgage term. However, the monthly rent roll from Tinkler’s Yard significantly exceeds these figures. The point made by Mr. Burke on behalf of Cheldon in para. 22 of his first affidavit is that, absent the proposed PIA, Cheldon would be entitled to appoint a receiver over Tinkler’s Yard and collect the entire rent roll. Mr. Burke suggests that, accordingly, the outcome for Cheldon is clearly better outside the PIA.
52. In response to Mr. Burke’s affidavit, the practitioner swore an affidavit on 6 July 2017 in which he said, at para. 9, that the net monthly rent (referable to Mr Noel Tinkler) is €2,041.20 from Tinkler’s Yard. As discussed further below, this is incorrect. In addition, it should be noted that it is clear from the terms of the PIA itself that one of the principal reasons why the practitioner proposes the retention of Tinkler’s Yard is that it generates 45% of the debtors’ income. By retaining Tinkler’s Yard, there will be a continued source of income from which other payments due by the debtor can be made, including, of course, the payments to be made to Start and Cheldon itself. The other side of that coin is that, in the absence of the PIA, the entire of the rent roll would be available to pay Cheldon in the event that Cheldon were to appoint a receiver over the rents. Cheldon would, in due course, also be in a position to sell Tinkler’s Yard but would be unlikely to achieve anything more on a sale than the value attributed to Tinkler’s Yard in the PIA. The sale would, however, generate an immediate return for Cheldon whereas under the PIA it will have to await payment of the stage payments envisaged over the course of the 72 month duration of the PIA.
53. In his replying affidavit sworn on behalf of Cheldon on 7 June 2018, Mr. Burke took issue with the suggestion made by the practitioner that the net income of Tinkler’s Yard in the case of Noel Tinkler was only €2.041.20. In para. 15 of his affidavit, Mr. Burke drew attention to the fact that in the repayment tables appended to the respective PIAs the income of Mr. Tinkler from the yard is stated to be €3,995.43, while the income of Mrs. Tinkler is stated to be €3,050.73, giving a total combined income of €7,046.16. Mr Burke made the point that the repayment provisions of the proposed PIAs are based on the figures of €3,995.43 and €3,050.73 respectively.
54. In his final affidavit sworn on 19 June 2018, the practitioner confirmed that Mr. Burke was correct and he apologised for what he described as a ” typographical error ” in his earlier affidavit. I have to say that I am surprised by the suggestion that the figure given in the practitioner’s first affidavit could be said to be a typographical error. On no reading of para. 9 of the practitioner’s affidavit sworn on 6 July 2017, could one conclude that the reference to €2,041.20 as the net monthly rent was simply a typographical error. On the contrary, it is clear that the practitioner very deliberately referred to that sum in contradistinction to the amount of €3,200.00 which had been the figure given by Mr. Burke in his first affidavit. In substance, the practitioner, in para. 9 of his affidavit is purporting to contradict what Mr. Burke had said as to the level of rental income available from Tinkler’s Yard. The practitioner, in para. 9, is seeking to suggest that Mr. Burke had overstated the amount of rent. I therefore cannot see any basis on which the practitioner can now plausibly suggest that his reference to €2,041.20 was merely a typographical error. I regret to say that I am wholly unimpressed by the practitioner’s attempt to characterise this as a typographical error.
55. I am also deeply unimpressed by a further feature of the practitioner’s affidavit sworn on 19 June, 2018. In para. 21 pf his affidavit, the practitioner says that: –
“If a receiver was appointed then there would be no tenants, no rent, and thereafter there would be the sale of the land and the factual and financial position would be that the creditor would have to discharge the cost of sale, the cost of the receiver and thus the comparison with bankruptcy is in fact absolutely one hundred percent correct.”
56. This averment on the part of the practitioner is, in turn, based on an averment by Mr. Noel Tinkler in his affidavit sworn on 25 June 2018 in which he says that the yard is a: – ” very old yard and is in disrepair “, and that he operates his gravel business from it together with his ” two other small businesses “. More pertinently, Mr. Tinkler continues in para. 8 of his affidavit as follows: –
“8. I say and believe that there are three tenants in situ since 2010. A Chinese take away, Indian take away, by the names of Mandarin House and Pure Indian and a mechanic business called Best Price Tyres. I say that I have spoken to the three tenants, being Jimmy Chan, Bhapa Singh, and Valdes Lydnusky. I say that they have outlined to me that if it was the case that a receiver and the uncertainty that brings was appointed on the basis of an inevitable sale in any event, they would immediately seek to transfer their business and move out of the yard. I beg to refer to a copy of a letters (sic) from each of them confirming the said position . . ..”.
57. Mr. Tinkler then exhibits two letters which are both in identical form and both very obviously typed on the same machine. One of them is signed by both Mr. Chan and Mr. Singh. The other is signed by Mr. Lydnusky. In both documents, the signatories confirm that they have ” developed a very strong professional relationship with . . .my landlords “. The documents then conclude in the following terms: –
“As a result, should Mr. and Mrs. Tinkler stop renting the premises and a new landlord appointed, I confirm that I would not hesitate to relocate my business to a different premises, as I do not believe I would enjoy the same working relationship with a new owner”.
58. These documents bear all the hallmarks of having been pre-prepared and placed in front of the tenants for signature. Quite apart from the hearsay nature of this material, it is of no evidential value in circumstances where the documents were not prepared by the tenants themselves. It is important to bear in mind that, in an application of this kind, the onus is on the practitioner and the debtors to place appropriate evidence before the Court to show that the proposals are not unfair. This was made clear by the Supreme Court in the context of examinerships in Re Tivway [2010] 3 IR 49. I am deeply unimpressed by this very naked attempt to manufacture evidence to support the proposition that Cheldon would be worse off in a receivership than it would be under the PIA. If there was genuine evidence to support such a case, it should have been presented to the court in the usual way on affidavit and any such affidavit should be drafted on the basis of the personal input of the deponent.
59. I must also record that, in my view, it is inherently improbable that tenants would choose to leave premises in which they have an established business just because there is a change in the landlord’s interest or because a receiver has been appointed over the rents. Unhappily, since the financial crisis in 2008, there have been a significant number of appointments both of receivers and of rent receivers. The Court would require evidence that such appointments have led to the loss of tenants. In the absence of evidence of that kind, I do not believe that I can place any reliance on the averments made by Mr. Tinkler and by the practitioner respectively in relation to the suggestion that the tenants will move if a reciever is appointed.
60. A separate point is made by the practitioner and by Mr. Tinkler in the same affidavits. It is suggested that there is no unfair prejudice in circumstances where (so it is contended) Cheldon purchased the loan book sold by Permanent TSB (to whom the original mortgage over the Tinkler’s Yard property was originally granted) at a very significant discount. Mr. Tinkler suggests that the loan book in question was ” one of the most impaired loan books in the Irish market ” and was sold for ten cents in the euro. On the basis of this suggestion, Mr. Tinkler speculates that his loan was purchased for ” circa 80,000.00″ whereas the return under the PIA would be €350,000.00.
61. In response, Mr. Burke, in his affidavit sworn on behalf of Cheldon on 7 June, 2018, makes the point that the test for unfair prejudice involves a comparison of the anticipated outcome for the relevant creditor under the proposed arrangement and the outcome that would arise in the likely alternative in the absence of such an arrangement. He reiterates the point previously made by him that the appointment of a receiver over Tinkler’s Yard would result in a: – ” manifestly better outcome . . . than under the PIA “. He also notes the concession made by Mr. Tinkler in para. 10 of his first affidavit that Cheldon stands in the shoes of the original lender and has the right to claim and sue on foot of the purchased debt.
62. It is this paragraph of Mr. Burke’s affidavit that leads to the averment made by the practitioner (in para. 21 of his affidavit sworn on 19 June 2018) that Cheldon would be worse off in the case of a receivership because it would be left with no tenants and no rent. I have already expressed my dissatisfaction with that suggestion. In my view, Mr. Burke is correct in what he says in para. 9 of his affidavit. In my view, it is very clear that Cheldon would be better off in a receivership than under the proposed PIA. Under the proposed PIA, Cheldon will not be in a position to recover any part of the rents other than the reduced monthly amount to be paid to it under the terms of the PIA for the 72 month period of the PIA. Furthermore, most of its debt will be written down very significantly. In contrast, in a receivership, while Cheldon will, of course, suffer a significant loss in the event that the premises are sold for €350,000, it will, in the event of a sale, have the ability to obtain an early payment of the full value of the property (less the costs of sale). While the costs of sale must of course be factored into the equation, the fact remains that pending any sale Cheldon will be in a position to appoint a receiver to collect the rents and will therefore have a significant income stream of just over €7,000 per month which it can use to discharge the costs of any sale and to pay down part of the indebtedness on foot of the loan accounts of the debtors or the loan accounts of the debtors which it purchased from Permanent TSB. In the course of the argument before me, it was suggested that Cheldon, as an investment fund, would have no interest in keeping a receiver in place for any length of time. However, that is an entirely speculative point. There are obvious commercial advantages for Cheldon in appointing a receiver over Tinkler’s Yard. The appointment of a receiver will generate a significant monthly income which, on an annualised basis, will be more than €84,000 per annum. When one compares that with the return which Cheldon will get under the PIA, it is obvious that even by leaving a receiver in place for six years (which would be the duration of the PIA if it was confirmed) Cheldon would generate receipts of more than €500,000. In addition, Cheldon would be in a position to dispose of Tinkler’s Yard at a time of its choice. If, for the sake of argument, it was to decide to sell after leaving a receiver in place for six years, and even if the value of Tinkler’s Yard had not increased in the meantime, it would ultimately generate gross receipts of more than €800,000 in respect of the debtors’ indebtedness. This is manifestly a greater return than anything it could achieve under the PIA. I fully appreciate that these are gross figures before deduction of costs and expenses. Nonetheless, one can readily see that Cheldon would be significantly better off in the context of a receivership than under the proposed PIAs. In these circumstances, it seems to me that, based on the generally accepted understanding of ” unfair prejudice ” as explained by the Supreme Court in McInerney Homes and in SIAC , Cheldon would be unfairly prejudiced by the proposal. More correctly, in the context of s. 115A(9)(f) I cannot be satisfied that the proposed PIAs are not unfairly prejudicial to the interests of Cheldon, as an interested party.
63. In these circumstances, I have come to the conclusion that, in addition to the reasons set out at paras. 17 to 46 above, I must refuse to confirm the proposals for the PIAs in these two cases in circumstances where I have not been persuaded that the requirements set out in s. 115A(9)(e) have been satisfied.
64. In reaching this conclusion, I have not taken into consideration the fact that Cheldon is an assignee of the original mortgagee, Permanent TSB. I appreciate that in Jacqueline Hayes [2017] IEHC 657, Baker J. distinguished between the position of a retail banking company and the position of a party such as Cheldon. However, that was in a very specific context – namely the fixing of an appropriate interest rate. In that case, Baker J. took the view that, insofar as interest rates are concerned, an investment fund is not in the same position as a bank. The latter would, from time to time, have to return to the market to meet ongoing capital needs such that any interest rate would have to reflect (and exceed) in some way ECB base rates. In contrast, there was no evidence in that case that an investment fund would ever have to return to the market.
65. In my view, there is nothing in the judgment of Baker J. in Jacqueline Hayes to suggest that investment funds are to be treated any differently to other creditors when it comes to a consideration as to whether they would be worse off in a bankruptcy than under an arrangement. In particular, I can see nothing in that judgment which would justify the court taking the approach suggested by Mr. Tinkler in his affidavit (summarised in para. 60 above).
66. In my view, the correct legal position is that Cheldon, as successor in title to Permanent TSB, is entitled to all of the contractual rights which were previously held by Permanent TSB including the right to recover in full the amounts due on foot of the loans purchased by Cheldon. Whether or not Cheldon purchased those loans at a discount is not, in my view, relevant. As a matter of law, Cheldon is entitled to recover the full amount due. Therefore, when considering whether Cheldon is unfairly prejudiced by the terms of the proposed PIA, the correct comparison to make is as between the amount which it would recover in a receivership (without making any discount for the fact that it may have purchased the loans at a discount) as against the recovery it is likely to make under a PIA.
67. In light of my conclusions in paras. 17 to 66 above, I do not believe that it is necessary to consider further the concerns expressed by Cheldon in relation to the preferential debt to the Revenue Commissioners.
Conclusion
68. For the reasons set out above, in each case, I must uphold the objection of Cheldon by reference to s 115A(9)(e) and (f). I must therefore refuse the application made by the practitioner in each case for an order confirming the coming into effect of the proposals.
Re: Lisa Parkin (a debtor)
[2019] IEHC 56
JUDGMENT of Mr. Justice Denis McDonald delivered on 4 February, 2019
Introduction
1. Ms. Parkin, the debtor in this case, was born in 1972. She is married but separated from her husband, who is now living in the United Kingdom. She has one dependent child (a daughter) who is now fifteen. Her daughter is obviously very talented. The evidence before the court shows that she is an excellent student and is particularly proficient in Irish. She is expected to do sufficiently well in her Leaving Certificate examinations to qualify to study veterinary medicine at UCD.
2. Ms. Parkin and her daughter live in the family home on Ballyfermot Road, Dublin 10. They have lived there since September 2005 when it was acquired, with the benefit of a bank loan, in the names of Ms Parkin and her husband.
3. In circumstances described in more detail below, Ms. Parkin’s husband moved to the United Kingdom in 2015. According to the evidence of Ms. Parkin, he makes no contribution, financial or otherwise, to the household. He does not contribute to the mortgage repayments, nor does he make any payment in respect of child maintenance.
4. As noted above, the family home was acquired by Ms. Parkin and her partner in 2005 with the assistance of a loan (secured in the usual way by a mortgage) from Permanent TSB (PTSB). Ms. Parkin is described in the papers before the court as a finance manager employed by the HSE. Her net monthly income from her employment is €2,909.47.
5. Ms. Parkin fell into financial difficulty for the first time in 2007. She explains in her affidavit that her husband developed an addiction to gambling and borrowed €7,000 from “loan sharks” which he used to place bets. This debt was simply too much to repay on top of the ordinary expenses of the household and Ms. Parkin says that, as a consequence, she and her husband began to fall behind on various bills. In para. 8 of her affidavit sworn on 9 January 2017, she says: –
“The people who provided the loan were unsurprisingly persistent to be repaid and we were coming under pressure to pay off the debt in full. The harassment was becoming worse and I borrowed a sum of money from my sister . . . in order to discharge the debt. My husband’s departure did not negatively impact [my financial situation] . . . as he was not contributing”.
6. Ms. Parkin also explains that, notwithstanding the episode with the loan sharks, her partner’s gambling problem became worse. At that stage, she first fell into arrears with the mortgage repayments to PTSB. It is clear from the summary estimated statement of affairs at Appendix 1 to the proposed Personal Insolvency Arrangement (“PIA”) that, in addition to the home loan liabilities to PTSB and the liability to her sister, she also incurred borrowing costs in respect of a loan obtained from her staff credit union at the HSE (“the credit union”) and she ran up a significant bill on her PTSB credit card.
7. In the meantime, in common with many other properties, the value of Ms. Parkin’s home fell significantly. The current debt due to PTSB and secured on the home is in the order of €333,785 while the value of the home has dropped to €160,000. This value has been agreed between PTSB and Ms. Judy Mooney, the Personal Insolvency Practitioner (“the practitioner”) acting in this case on behalf of Ms. Parkin.
8. There is no dispute between the parties that, as of 1 January, 2015, Ms. Parkin was in arrears with her payments in respect of the PTSB home loan. Ms Parkin’s indebtedness on foot of the loan is therefore a relevant debt for the purposes of s 115A(18) of the Personal Insolvency Act 2012 (“the 2012 Act) such as to satisfy the gateway requirement of s. 115A. In the Circuit Court, Ms Parkin sought and obtained an order under s 115A(9) confirming the coming into effect of proposals for a Personal Insolvency Arrangement (“PIA”) notwithstanding that the proposals have been rejected by a majority (in value) of her creditors.
9. It should be noted, at this point, that the home loan (and the relevant mortgage in favour of PTSB) are in the joint names of Ms. Parkin and her husband. The family home (which is clearly a principal private residence for the purposes of the Personal Insolvency Acts 2012 – 2015) is also in joint names.
10. Ms. Parkin has not taken any steps against her husband to require him to make any contribution to the mortgage repayments or to the maintenance of their daughter. In para. 6 of her affidavit sworn on 9 January 2017, Ms. Parkin says that her partner: –
“. . . does not communicate with me and I do not know the address at which he currently resides nor do I have any forwarding address for him. I say that [he] has deliberately not provided me with any contact details lest he is pursued for child maintenance or other financial obligations. My daughter visits her grandmother in Yorkshire and has met her father there. . . .”
The application under the 2012-2015 Acts
11. Proceedings under the 2012 – 2015 Acts were commenced in the Circuit Court in 2016. In accordance with the requirements of the Acts, the practitioner formulated proposals for a PIA which were considered by Ms. Parkin’s creditors at a meeting of creditors held on 7 November, 2016. Under the proposals, the secured debt on foot of the mortgage granted to PTSB will be written down to €160,000 (which is the agreed market value of the principal private residence). The balance of €173,785.39 will be treated as unsecured debt and will share with the credit union a dividend of 8 cent in the euro. At the end of the PIA, the balance of the unsecured element of the debt will be written off.
12. The creditors’ meeting was attended by two creditors namely PTSB and the credit union. PTSB voted against the proposal. The credit union voted in favour. The total debt due to PTSB (including the sum of €9,948 due on foot of Ms. Parkin’s credit card and the sum of €20 due on foot of a personal loan) amounted to €343,753.00. In percentage terms this represents 98.9% of the total debt voted at the meeting. The amount due to the credit union is €3,752.43 which represents 1.1% of Ms. Parkin’s total indebtedness. Thereafter, an application was made to the Circuit Court by the practitioner under s. 115A(9) seeking an order confirming the coming into effect of the proposed PIA notwithstanding that it had been rejected in the manner outlined above. For the purposes of satisfying the requirements of s. 115A(9)(g), the practitioner argued that the credit union comprised a separate class of creditor from PTSB. For this purpose, s. 115A(17)(a)(i) enables a court to consider a single creditor as a separate class.
13. PTSB filed a Notice of Objection in the Circuit Court. In that Notice, PTSB raised a number of issues as follows: –
(a) It was contended that the credit union could not be said to constitute a separate class of creditor;
(b) It was contended that it was not appropriate for the court to approve the arrangement in circumstances where an alternative had been put forward by PTSB which, it was contended, was ” fairer and /or more appropriate (including to unsecured creditors by reason of providing a better return for them of 10.11% as opposed to 5.51%)”. At this point, I should record that on 3 and 7 November 2016, PTSB put forward an alternative proposal that would have split the mortgage debt into two parts namely (a) a live balance of €236,000 which would continue to accrue interest at 3.25% per annum and (b) the ” warehousing ” of the balance of €97,785 at zero interest ” with a 30% LTV write down upon maturity, if applicable “. The counterproposal also proposed an extension of the term to 312 months. At the end of that term, the warehoused balance would become due subject to the possibility of the partial LTV write-down mentioned above. In, the meantime, Ms Parkin would have a monthly mortgage bill in the order of €1,121.
(c) It was contended that the position adopted by the practitioner that the warehousing of a debt did not comply with the 2012 – 2015 Acts was an ” error of law “;
(d) It was argued that the PIA will not enable creditors (and in particular PTSB) to recover debts due to them to the extent that the means of the debtor reasonably permit. It was contended that this was a breach of s. 115A(9)(b)(ii).
(e) Reliance was also placed on s. 115A(9)(e) and (f) of the 2012 Act, (as amended). In support of this proposition, the notice stated that PTSB ” will rely, in particular, on the fact of the sizeable upfront write-down proposed in the PIA”.
(f) The fact that the debt was a joint debt with Ms. Parkin’s husband was also a ground of objection. It was submitted that, to grant the order sought, would be to reduce the debt in respect of which Ms. Parkin’s husband is jointly and severally liable and that this would breach s. 115A(9)(b)(ii) of the 2012 Act (as amended). In particular, it was argued that the terms of the proposed PIA did not address the joint borrowings in a manner that would preserve the rights of PTSB as against Ms. Parkin’s husband.
14. A hearing subsequently took place before Her Honour Judge Susan Ryan in the Circuit Court at which PTSB and the practitioner were represented by counsel. On 9 August 2017, the learned Circuit Court Judge delivered a written judgment in which she rejected the grounds of objection and expressed the view that the proposed PIA does not unfairly prejudice PTSB.
15. Since the decision of the learned Circuit Court Judge, Ms Parkin has complied with the terms of the PIA.
The appeal
16. PTSB has appealed the decision of the learned Circuit Court Judge. Since an appeal from the Circuit Court to the High Court is an appeal by way of rehearing, a full rehearing of the application took place before me on Monday 3 December, 2018 at which the practitioner was represented by junior counsel and PTSB was represented by both senior and junior counsel.
17. Very helpful written and oral submissions were made which have assisted in crystallising the issues that now fall for determination by me. PTSB drew attention to the far reaching nature of s. 115A and submitted (correctly in my view) that the onus of proof lies on the practitioner to demonstrate that all of the requirements of s. 115A have been satisfied. PTSB relies in this context on the observations of Baker J. in Laura Sweeney [2018] IEHC 456 at para. 60 where she emphasised that the court can only approve a PIA where all of the statutory tests are met. PTSB also relies on the observation of Baker J. in Siddhartha Varma [2017] IEHC 218 at para. 23 where Baker J. drew attention to the impact which relief under s. 115A can have on the contractual and property rights of a creditor.
18. PTSB also contends that the onus lies on the practitioner to justify why the counter-proposal made by it (summarised in para. 13(b) above) ought not to be adopted.
19. PTSB strongly urges that the means of Ms. Parkin permit a greater recovery for PTSB than is proposed under the PIA. In this context, PTSB complains that, even if the practitioner was justified in not accepting the PTSB counter-proposal, the PIA should nevertheless have provided for some level of warehousing under which more extensive payments could be made in the future.
20. Having regard to Ms Parkin’s means, PTSB also argues that the proposed write-down of the PTSB mortgage debt to the current market value of the principal private residence of Ms. Parkin is unnecessary and unjustified. PTSB submits that, in cases of this kind, it is incumbent on the practitioner to objectively justify a write-down of this nature.
21. In light of the manner in which the 2012-2015 Acts engage the constitutionally protected property rights of secured creditors, PTSB submits that, having regard to the approach taken in Heaney v. Ireland [1994] 3 I.R. 593, the court is required to consider, insofar as possible, whether there is an alternative proposal which is less intrusive to the rights of the creditor. In this context, PTSB argues that this requires that the practitioner must conduct a real and substantiated analysis as to what level of postponed or “warehoused” debt would be affordable.
22. PTSB also contends in this regard that the future pension entitlements of Ms. Parkin are relevant and must be taken in account.
23. PTSB complains that the PIA makes no provision for contributions from Mr. Parkin and PTSB argues that Ms Parkin should have made attempts to pursue Mr Parkin.
24. Furthermore, PTSB submits that the practitioner has failed to substantiate the claim that the credit union constitutes a separate class of creditors for the purposes of s. 115A.
The credit union as a separate class of creditor
25. It seems to me that, logically, I should deal with the last of those issues first. If no class of creditor has accepted the proposed arrangement by a majority of more than 50% of the value of the debts owed to that class, the court could not make an order confirming the coming into effect of the proposed PIA. Section 115A(9)(g) makes that clear.
26. In the papers before the Circuit Court the practitioner had contended that the credit union formed a separate class of creditor on the grounds that the credit union was: –
“… A mutual organisation owned by the members with profit being shared between the members and operating in the interests of those members. A mutual lender must be formed for one or more objects and that the members must have a “common bond”. A member must also have at least one fully paid-up share in the credit union. Further, the creditor is regulated under distinct regulatory frameworks and under law. In that regard, I consider the credit union to be in a separate class as their rights are so dissimilar that it would be impossible for them to consult together with any other creditor with a view to their common interest. …”.
27. PTSB, in its submissions, relied on the judgment of Baker J. in Sabrina Douglas [2017] IEHC 785 where Baker J, at paras. 37-38, held that a credit union could not be characterised as a separate class of creditors ” merely on account of the rules governing membership of the society “. Baker J. explained that the rules of a credit union, while relevant to the nature or legal status of such an entity, do not provide any support for treating a credit union as a separate class. Baker J. emphasised that what s. 115A is concerned with is the nature or claim of a creditor as against the debtor.
28. In Sabrina Douglas , Baker J. followed the same approach that is traditionally taken in the context of the constitution of classes for the purposes of voting on a scheme of arrangement under the Companies Act. In particular, Baker J. followed the approach taken by Laffoy J. in Re: Millstream Recycling [2010] 4 IR 253 where Laffoy J. applied the classic test laid down in Sovereign Life Assurance Company v. Dodd [1892] 2 Q.B. 573 where Bowen L.J. said:
“It seems plain that we must give such a meaning to the term “class” as will prevent [the statutory provision] being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest”.
29. In the Circuit Court, the learned Circuit Court Judge did not accept the basis for the characterisation of the credit union as a separate class which had been suggested by the practitioner (as outlined in para. 26 above). Nevertheless, she took the view that, given the composition of the liabilities due and owing to PTSB (which involve both secured and unsecured elements), it could not be said that the credit union and the PTSB shared a common interest. In contrast, the debt due to the credit union was entirely unsecured. For that reason, Judge Ryan held that the credit union constituted a separate class.
30. In my view, the approach taken by the learned Circuit Court Judge was entirely correct. There were only two creditors who participated in the meeting – namely the credit union and PTSB. The credit union was solely an unsecured creditor. However, PTSB was both an unsecured creditor (in respect of the credit card and loan accounts) and a secured creditor in respect of the mortgage account. The fact that PTSB held a mortgage over the family home in respect of the bulk of the debt due to it shows very clearly that its rights were markedly different to those of the credit union. Because such a significant element of the debts due to PTSB were secured by the mortgage, PTSB’s interest was in securing an outcome that best preserved its rights under the mortgage. In contrast, the credit union was solely concerned as an unsecured creditor. Its interests were in securing an outcome which maximised the return to unsecured creditors. In these circumstances, it seems to me that the rights and interests of PTSB and the credit union were so dissimilar as to make it impossible for them to consult together with a view to their common interest. In short, they had no common interest.
31. In the course of argument, it was suggested by counsel for PTSB that, in circumstances where the practitioner had relied solely on the credit union’s mutual status in his statement given under s. 115A(2)(a)(ii), he could not now seek to put forward a different basis for his contention that the credit union should be treated as a separate class. I reject that argument. In my view, it is clear from s. 115A(17) that it is for the court to form a view as to whether any individual creditor or group of creditors should be treated as a class of creditor for the purposes of s. 115A. The role of the court in relation to this issue is not circumscribed by the approach taken by the practitioner. The court is free to reach its own view.
32. For the reasons discussed in para. 30 above, I hold that the credit union is to be treated as a separate class for the purposes of s. 115A. I appreciate that, on an overall basis, the debt due to the credit union represents no more than 1.1% of Ms Parkin’s indebtedness. I must, of course, bear in mind s. 115A(17)(b)(ii) which requires the court to have regard (inter alia) to the proportion of the debtor’s debts due to the creditor forming a separate class. Nonetheless, in the context of Ms Parkin’s means, a debt of €3,816 is not insubstantial. It represents more than one month’s income after tax. The credit union is also the only totally unsecured creditor to vote and, in those circumstances, its voice is important. Accordingly, I am of the view that it is appropriate that it should be regarded as a separate class.
33. In light of the findings made in paras. 30 and 32 above and in circumstances where the credit union has voted in favour of the proposed PIA, I find that the provisions of s. 115A(9)(g) have been compiled with in this case.
Warehousing
34. At the time the proposals for the PIA were formulated by the practitioner in this case, it was understood by the practitioner that warehousing of debt was not permitted under the 2012-2015 Acts. However, this view was rejected by the learned Circuit Court Judge who referred in her judgment to the decision of Baker J. in Paula O’Callaghan [2018] 1 IR 335 where Baker J. dismissed an argument that the statutory scheme of the 2012-2015 Acts precluded warehousing as an element of proposals for a PIA. For this purpose, Baker J considered the different ways in which s 102 of the 2012 Act envisages that a PIA can address secured debt. At para. 45 of her judgment in Paula O’Callaghan Baker J. said:
“I agree with the argument of KBC that the list contained in s. 102(6) is not intended to be exhaustive. The section is permissive and does not mandate the means by which a secured debt may be restructured, and neither s. 100 nor s. 102(6)(d) preclude a proposal by which a warehoused amount becomes payable after the expiration of the term of a PIA.”
35. During the course of the hearing before me, it was argued on behalf of the practitioner that Baker J. had subsequently taken a different approach in Jacqueline Hayes [2017] IEHC 657. In particular, it was submitted that, in para. 46 of her judgment in Jacqueline Hayes, Baker J. had stressed the difference in language between s. 102(6)(d) of the 2012 Act on the one hand and the provisions of s. 102(6)(e) on the other. In the case of the latter, no temporal limitation is placed on a proposal to fix an interest rate under a PIA. In the same paragraph, Baker J. stressed that this is quite different to s. 102(6)(d) (dealing with a deferral of secured debt payments). Section 102(6)(d) imposes a temporal limitation on proposals to defer payment of secured debt. In particular, it provides that any such deferral is not to ” exceed the duration of Personal Insolvency Arrangement” . Counsel argued that, since warehousing involves deferral of part of a debt, s 102(6)(d) must therefore mean that warehousing is not permissible in the context of a PIA. Counsel argued that the fact that Baker J had adverted, in Jacqueline Hayes , to the provisions of s. 106(2)(d), must mean that she was adopting a different view to that previously taken by her of the same subsection in Paula Callaghan .
36. Notwithstanding the very able arguments of counsel for the practitioner, I do not believe that I can construe what was said by Baker J. in her judgement in Jacqueline Hayes as overruling or departing from the ratio of her previous decision in Paula Callaghan . If Baker J. had intended to overrule her previous decision in Paula Callaghan , I believe she would have made that clear in her judgment in Jacqueline Hayes . It is noteworthy that in her judgment in Jacqueline Hayes , she expressly refers to her previous decision in Paula Callaghan and does not call it into question in any way. Furthermore, Baker J, in Laura Sweeney [2018] IEHC 456, having cited her decision in Paula Callaghan , reiterated in para. 56 of her judgment that it may be appropriate in certain cases to split or warehouse part of a debt. In these circumstances, I believe that I must treat the decision of Baker J. in Paula Callaghan as authority for the proposition that proposals for a PIA which include a proposal to warehouse part of a mortgage debt are not per se contrary to the provisions of the 2012 – 2015 Acts. Given that the decision of Baker J. in Paula Callaghan is a relatively recent decision by a judge with unparalleled experience and expertise in personal insolvency matters, I do not believe that it would be appropriate for me to do anything other than to follow that decision. The decision of Clarke J (as he then was) in Worldport Ireland Ltd. (in liquidation) [2005] IEHC 189 makes this very clear. In that case, Clarke J. said at pp 7 – 8: –
“I have come to the view that it would not be appropriate . . . for me to revisit the issue so recently decided by Kearns J. . . . It is well established that, as a matter of judicial comity, a judge of first instance ought usually follow the decision of another judge of the same court unless there are substantial reasons for believing that the initial judgment was wrong. . . . Amongst the circumstances where it may be appropriate for a court to come to a different view would be where it was clear that the initial decision was not based upon a review of significant relevant authority, where there is a clear error in the judgment, or where the judgment sought to be revisited was delivered a sufficiently lengthy period in the past so that the jurisprudence of the court in the relevant area might be said to have advanced in the intervening period In the absence of such . . . circumstances it seems to me that the virtue of consistency requires that a judge of this court should not seek to second guess a recent determination of the court which was clearly arrived at after a thorough review of all of the relevant authorities . . .”
37. In the course of the hearing before me, counsel for the practitioner did not identify that any of the additional circumstances discussed by Clarke J. in Worldport could be said to apply here. Accordingly, it would be quite wrong for me to revisit the approach taken by Baker J. in Paula Callaghan . Unless and until a different decision is given by the Court of Appeal or the Supreme Court, I believe that I should follow and apply the law in relation to warehousing as explained by Baker J. in Paula Callaghan and reiterated in Laura Sweeney .
38. I must therefore find that, there is no reason in principle why proposals for a PIA might not include a proposal for warehousing of part of a secured debt.
39. That is not to say that warehousing will be appropriate in any particular case. On the contrary, the decision in Paula Callaghan illustrates that, while warehousing is permissible in principle, it may not work in practice. The decision in Paula Callaghan demonstrates this very well. In that case, the secured indebtedness amounted to €285,647. The value of the principal private residence was agreed under s. 105 at €105,000. In the proposals for a PIA, it was proposed that there should be a debt write-off of €165,647 leaving a live mortgage balance of €120,000. KBC Bank had made a counterproposal to write off €15,000 and then to split the remaining mortgage debt of €270,000 into two moieties of €135,000 each. The first moiety was to be paid by instalments in the traditional way. KBC proposed that the second moiety would carry interest at 0%; that the security would not be enforceable until after the debtors had died which meant that the debtors would be permitted to occupy their principal private residence for the rest of their lives. I agree with the submission made by counsel for the practitioner in this case, that the warehousing proposal in Paula Callaghan was significantly more beneficial to the debtors there than the proposal made by PTSB here. Nonetheless, Baker J. refused to accept that the counterproposal was appropriate. At paras. 79-81 of her judgment, she said: –
“[79] However, the fact that a court will not require that a PIA would guarantee solvency into the future has the corollary that a court will equally not make assumptions regarding the likely financial or other circumstances of a debtor far into the future. In the present case whilst the counterproposal does make provision for the continued occupancy by the debtors of their principal private residence for their respective lives, it is predicated on assumptions and conjecture regarding the living arrangements of the debtors far into the unknown future to a time at the expiration of the mortgage term, when Mr. Callaghan will be 62 years of age and his wife close to that age.
[80] In addition I am not satisfied that the reasonableness of the counterproposal is to be tested in the light of an assumption that the couple will wish to remain living in their present home for the rest of their lives, or even for the rest of their working lives. Many life events could mean that they will wish or need to live elsewhere.
[81] It is crucial in this context that s. 90 of the 2012 Act precludes a debtor entering into more than one personal insolvency arrangement in his or her lifetime. This means that the legislation envisages an arrangement which will deal with all present insolvency of the debtors or at least the achieving of solvency within five years. 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. Because a PIA is a once in a lifetime solution it would be wrong to test the reasonableness of a proposal in the light of a preferred solution or counterproposal that could on its terms result in insolvency at a future date. The discussion above with regard to speculative proposals is also relevant in regard to this proposition. A warehousing solution should on present or known figures offer a solution to indebtedness that is likely to be achieved. Neither of the debtors has the benefit of a pension which might provide a lump sum on retirement to deal with the warehoused amount. The repayment of the inactive [moiety] therefore is not predicated on any anticipated ability to pay in the future, and is entirely on the hazard. This results in unfairness [to the debtor] at a level which I consider material.”
40. Counsel for the practitioner in this case relied very strongly on these observations by Baker J. He submitted that the PTSB counterproposal here is essentially predicated on a future sale at a time when Ms Parkin will be at an advanced age. This is because the warehoused amount of €97,785.00 will become due upon maturity (following the expiry of the proposed extension of the term of the PTSB mortgage loan to 312 months). While there is the possibility of a 30% loan-to-value write-down, this is not guaranteed. Thus, unless Ms. Parkin is in a position to pay €97,785.00 on maturity, she will be left with no alternative but to sell her home. By that stage, Ms. Parkin will be 71 years of age. While it is likely that her retirement age will be 68, and while it appears that she will be entitled to payment of a pension, counsel for the practitioner urged that the observations of Baker J. in Paula Callaghan (quoted in para. 39 above) apply with even greater force here given that the KBC proposal in that case at least gave the debtors security of tenure in their home for their lifetime. In contrast, in the present case, counsel submitted that Ms. Parkin would be facing a very significant liability in her old age, and would very likely have to sell her home in order to meet the liability that would crystallise at age 71. Counsel also submitted that the warehousing of part of the debt would effectively mean that Ms. Parkin would remain insolvent even after the termination of a PIA. In this regard, he drew attention to the observation of Baker J. in Laura Sweeney , where she said at para. 46: –
“. . . .it must be recalled that a person may avail of a PIA only once in a lifetime, and that must mean that the court ought not to make an order which, on known figures, is likely to lead to insolvency at an identifiable time in the future, even if that time is far into the future”.
41. On the other hand, counsel for PTSB stressed that the observations of Baker J in Paula Callaghan suggest that she had in mind that a different conclusion might have been open, in that case, had the debtors there had the benefit of a pension arrangement which would have given rise to a lump sum payment on reaching retirement age. This is an issue that I consider further below when I address the arguments of the parties in relation to Ms Parkin’s pension entitlements.
42. In light of the approach taken, on the facts, in Paula Callaghan , it is understandable that warehousing does not regularly feature in proposals for PIAs. The observations of Baker J. in that case (as quoted above) make very clear that even a relatively benign warehousing proposal may encounter difficulty for the reasons explained by Baker J. – namely that it is capable of creating circumstances amounting to insolvency at the end of the mortgage term. In this context, it is important to bear in mind that, between now and the end of the mortgage term, Ms Parkin will continue to have to incur the ordinary expenses of life. For example, money will inevitably be required from time to time for expenses such as medical and dental treatment and for the upkeep and maintenance of the family home; and relatively large sums may need to be spent when the roof springs a leak or the windows need to be replaced or the central heating irretrievably breaks down.
43. That is not to say that there may not be cases where warehousing may be appropriate on the facts. It will always depend on the particular facts of an individual case. In order to properly evaluate its potential applicability here it is necessary to consider the evidence in more detail and to address the underlying issue of affordability. I will therefore return to the issue in the concluding section of this judgment.
Affordability
44. In the course of the hearing before me, it was strongly urged by counsel for PTSB that, even if the practitioner was not obliged to incorporate the PTSB warehousing proposal into the terms of the PIA, the practitioner had an obligation to consider what was affordable for Ms. Parkin. PTSB makes the case that the means of Ms. Parkin permitted a greater recovery for PTSB than is proposed under the PIA. PTSB contended that the approach taken by the practitioner was highly conservative, and that the practitioner has wholly failed to justify why, under the proposals made by her, the mortgage debt is written down to market value notwithstanding the level of Ms Parkin’s income. PTSB lays emphasis on the observation made by Baker J. in Laura Sweeney at para. 56 where she said: –
“The determination as to whether a mortgage debt is to be written down is to be made by reference to the affordability of payment”
That observation must be seen in the context of s. 115A(9)(b)(ii) of the 2012 Act which makes it clear that the court must be satisfied that there is a reasonable prospect that confirmation of the proposed PIA will enable the creditors of the debtor to ” recover the debts due to them to the extent that the means of the debtor reasonably permit .”(emphasis added).
PTSB complains that, in circumstances where the practitioner proposes the maximum possible write-down, (i.e. a write-down to market value), the practitioner ought to be required to satisfy the court as to why a permanent write-down of debt should take place rather than a postponement of some of the debt pending a further payment in the future (i.e. warehousing). PTSB further submits that, in the present case, the evidence suggests the availability of additional and ascertainable income which has not been properly addressed by the practitioner. In addition, PTSB contended, in the course of the hearing before me, that the practitioner has failed to explain the rationale for the write-down of the mortgage debt to market value. PTSB highlights what it characterises as a bald averment made by the practitioner at para. 9 of her affidavit sworn on 18 May 2017 where she says: –
“I say and believe that the write-down is based on the current affordability of the Debtor in a fair and equitable treatment between the Creditors including both secured and unsecured Creditors in the personal insolvency arrangement proposal. Indeed, it is the case that there are few certainties in personal insolvency and bankruptcy and rather there be (sic) an arbitrary write-down wherein I would pick a figure I have grounded the restructure (and write-down) on the certainties of the PIA, being the agreed s. 105 valuation and the proven and accepted income and expenditure, and thus the agreed capacity”.
45. PTSB says that this passage is not easy to understand but that what it appears to suggest is that the write-down amount here was selected on the sole basis that the relevant figure was said to be one of the ” certainties of the PIA ” namely the agreed valuation under s. 105 (which represents the maximum permissible write-down under s.103). According to PTSB, it is familiar with similar averments by practitioners which invariably state that a write-down, often to current market value, has been determined on the basis of ” affordability ” with no other supporting detail being provided whatsoever. PTSB seeks to make the case that such ” bland averments ” are entirely inappropriate. As noted above, PTSB suggest that this issue has to be viewed against the background where, as Clarke J. acknowledged in Re: McInerney Homes [2011] IEHC 4 at para 3.10 that: –
“. . . in assessing whether a scheme is fair or “unfairly prejudicial” the court must have regard to the secured status of . . . [secured] creditors and the fact that that enhanced status places those creditors in an advantageous position in any alternative scenario such as liquidation or receivership”.
46. PTSB also anchors its argument by reference to the manner in which s. 115A impinges on its constitutionally protected property rights. PTSB relies on the well-known passage in Heaney v. Ireland [1994] 3 IR 593 at p. 607 where Costello J. (as he then was) said: –
” . . .The objective of the impugned provision must be of sufficient importance to warrant overriding a constitutionally protected right. It must relate to concerns pressing and substantial in a free and democratic society. The means chosen must pass a proportionality test. They must: —
(a) be rationally connected to the objective and not be arbitrary, unfair or based on irrational considerations;
(b) impair the right as little as possible, and
(c) be such that their effects on rights are proportional to the objective . . .”
47. Against a background where (as the judgments of Baker J. in a number of cases make clear) s. 115A adversely affects the constitutionally protected property rights of secured creditors, PTSB submits that its rights should be impaired to the smallest extent possible by any proposed PIA. Thus, PTSB argues that the court should very carefully scrutinise the evidence as to affordability particularly in circumstances where the practitioner proposes to reduce the mortgage debt to the maximum extent permitted under s. 103 – namely to the agreed market value of the underlying security.
48. In order to address the case made by PTSB in relation to affordability, it is necessary to consider the evidence before the court in relation to this issue. As noted above, the affidavit evidence filed by the practitioner has been heavily criticised by PTSB. In addition to the principled criticisms outlined above, PTSB also makes a number of specific criticisms about (a) the failure of the proposals to take account of the full extent of the income which will be available to Ms Parkin after the PIA comes to an end; (b) the failure of the proposals to address the likely pension entitlements of Ms. Parkin; (c) the likelihood that her salary will increase over time; (d) the fact that Ms. Parkin’s daughter will not be a dependent once she obtains her primary university degree; and (e) the manner in which the PIA makes no provision for any contributions at all from Mr. Parkin, the estranged husband of Ms. Parkin.
The evidence before the court
49. In light of these criticisms, it is necessary to carefully analyse the evidence before the court. While significant criticism has been made by PTSB of the affidavit evidence of the practitioner there is a significant level of detail relating to the means of the debtor contained in the proposals for the PIA and the accompanying appendices. Appendix 2 to the proposed PIA shows that, for the proposed six-year duration of the PIA, the entire of the net employment income of Ms. Parkin will be utilised. Her net income per month is €2,909.47. Out of this, the reasonable living expenses of Ms Parkin and her daughter will be met, €924.06 will be paid in respect of mortgage repayments to PTSB, €53.33 will be paid in years 1-5 in relation to Irish Language courses for Ms. Parkin’s daughter (i.e. while she remains at secondary school), €26.25 will be paid in respect of local property tax each month and from year 6 onwards (until the daughter secures her degree in veterinary medicine) a sum of €549.91 per month will arise in respect of third level education costs. This figure of €549.91 is based upon the amount allowed by the official assignee in a bankruptcy for a child in third level education. Appendix 4 shows that the remaining balance will be applied in discharge of the fees of the practitioner over the six-year term of the PIA.
50. It is true that the terms of the proposed PIA might suggest that the employment income of Ms. Parkin will remain static at €2,909.47 net per month. Given Ms Parkin’s employment with the HSE, this seems to me to be inherently unlikely. However, para. 10 of Part IV of the PIA makes clear that in the event that Ms. Parkin receives additional income in excess of the amount listed in Appendix 2, she will be required to contribute additional income in accordance with Clause 12 of the standard terms of the PIA. Similarly, if the debtor becomes entitled to a windfall at any time during the lifetime of the PIA, this will be dealt with in accordance with Clause 11 of the standard terms and Ms. Parkin will be required to introduce an amount not less than 50% of the net proceeds of any inheritance received during the term of the PIA. Thus, in the event that Ms. Parkin is entitled to increases in her employment income (whether by way of incremental increases in salary or increases awarded under public pay guidelines) which exceeds €100 per month, Ms. Parkin will be required to account to the practitioner for such payments and the creditors of Ms. Parkin (including PTSB) will benefit in accordance with paras. 11 and 12 of the standard terms.
51. Thus, insofar as PTSB complains about the lack of information in relation to likely salary increases available to Ms. Parkin, I do not believe that this is a significant concern. In making that observation, I stress that I do not wish in any way to suggest that it is appropriate for practitioners, in moving an application under s. 115A, to overlook expected salary increases. In my view, on an application of this kind, the proposals for the PIA should expressly address both known future salary increases and any likely increases. Furthermore, in any application to the court under s. 115A, I believe that the practitioner and the debtor should place full information before the court in relation to any entitlement to salary increases or pension entitlements (the latter issue is addressed in more detail below). It is plainly unsatisfactory that creditors or the court should be left in the dark in relation to such issues. The averment made by the practitioner in para. 18 of her affidavit sworn on 18 May 2017 is particularly unhelpful to the court in this context. There, the practitioner says: –
“I have discussed the Debtor’s income and any increments that may be applicable in the coming years. I say that I am informed that the debtor is not in a position to confirm what, if any increments she will receive in the coming years. It is also worth noting that public service pay has in fact reduced over the last number of years”.
52. In my view, this is patently unsatisfactory. It suggests that the issue was not adequately investigated by the practitioner. In my opinion, the practitioner should have set out exactly the debtor’s entitlements to any increases in salary over the next number of years and in particular over the six-year lifetime of the proposed PIA. It is impossible to accept that Ms. Parkin (as a finance manager with the HSE) would not be in a position to obtain details from her employer as to any increases that are due to be paid to her over the next number of years or any increases that are likely to be made.
53. Nonetheless, I do not believe that the failure to provide details of any increases in salary is, of itself, fatal to the present application. As a public servant, any increases to which Ms. Parkin may be entitled in the future are likely to be extremely modest and, therefore, I do not believe that they would make a substantial difference to the overall affordability of any PIA proposals. Moreover, as set out above, any such increases will have to be accounted for in accordance with the standard terms of the PIA and therefore PTSB will obtain the benefit of them by a proportionately larger payment of dividend in respect of the unsecured element of the debt for the duration of the PIA.
54. The next point made by PTSB is that, quite apart from any increases in salary which may accrue to Ms. Parkin, the information contained in the appendices to the proposed PIA shows very clearly (so it is argued) that Ms. Parkin will be able to afford more by way of payments in the future than is currently provided for under the proposed PIA. In the written submissions delivered on behalf of PTSB the case is made, by reference to appendix 2 to the PIA, that Ms. Parkin will have a ” surplus ” of €358.77 per month. PTSB says that this equates to a surplus of €4,305.24 per annum. If Ms. Parkin worked until age 66 this would generate an overall ” surplus ” of €60,273.36 (this is calculated by multiplying the annual ” surplus ” by the period of fourteen years that would elapse between the end of the PIA and Ms. Parkin’s 66th birthday in 2038).
55. PTSB says that if Ms. Parkin worked until she was 68 (which will occur in 2040) she will have accumulated a ” surplus ” of €68,883.84. On this basis, PTSB argues that it is clear that Ms. Parkin can afford significantly higher payments than the figure of €924.06 which will be the monthly sum payable under the mortgage under the terms of the proposed PIA.
56. As noted above, the argument made by PTSB in this context is predicated upon appendix 2 to the PIA which shows that in year 6 of the PIA and in the first year after the PIA, Ms. Parkin will have a monthly ” surplus ” of €358.77 after payment of the “set costs”, the mortgage repayment, the local property tax and college costs at €549.91. In reality, however, when one takes the fees of the practitioner into account together with the payment of the dividend to the unsecured creditors, the ” surplus ” will not arise in year 6 but will arise for the first time after the expiry of the 6-year period. It also has to be said that Ms Parkin would be doing very well if she can manage to keep her daughter’s monthly college costs to €549.91.
57. In response to this part of the PTSB case, counsel for the practitioner stressed that the ” set costs ” of €1,506.06 are based on the Insolvency Service of Ireland (” ISI “) reasonable living expenses. Counsel argued that a debtor who successfully completes a PIA has earned the right to return to some semblance of normal life and should not be confined to such living expenses once the PIA comes to an end.
58. However, PTSB submits that, in addition to the ” surplus ” of €358.77 per month, there would be a further ” surplus ” arising in the future in circumstances where the college costs allowed at €549.91 per month will not continue indefinitely. PTSB suggests that it is reasonable to take the view that they will not continue after Ms. Parkin’s daughter reaches the age of 23 years. If that figure per month is factored into the equation, PTSB suggests that this will increase the overall surplus available to Ms. Parkin at age 66 to €146,059.32 or, were she to work until aged 68, this will increase by a further €21,908.32 to €167,867.64. PTSB makes the case that this is considerably higher than the sum of €97,785 which PTSB proposed should be warehoused and PTSB submits that, accordingly, Ms Parkin could well afford to pay them the warehoused amount or a significant part of it.
59. At first sight, this submission by PTSB appears to have significant force particularly in relation to the period after Ms. Parkin’s daughter will be able to support herself. It is clear from the judgments of Baker J. that affordability is key in determining what is an appropriate write-down of secured debt. This was emphasised by her in Laura Sweeney at para. 56. If the PIA is approved, the result will be that, even if Ms. Parkin’s net salary were to be frozen at €2,909.47 for the rest of her life, only €924.06 of that sum would have to be paid in mortgage costs every month leaving Ms. Parkin with a figure of almost €2,000 per month available to meet her ordinary living expenses and to cover the occasional emergency expense that arises from time to time in everyone’s life. That might appear to be an overly generous margin but it has to be borne in mind that, out of that sum (or any enhanced sum in the event that Ms Parkin secures an increase in salary) her ordinary expenses of life will have to be discharged. The Guidelines issued by the ISI envisage that the reasonable living expenses of a single adult with a car will be €1,050.48 per month. That might appear to leave Ms Parkin with a very generous cushion even after her reasonable living expenses are taken into account. However, it must be borne in mind that those guidelines are intended to be applied for the duration of a bankruptcy, a PIA, or a debt settlement arrangement. They are not intended to be a measure of the expenses likely to be incurred over the course of a longer period and they are certainly not designed to apply for a lifetime. For example, they envisage an exceptionally modest sum of €0.97 per month for personal costs and an extremely modest sum of €31.34 per month for health. They are also based on very modest provision for contingencies and savings of no more than €43.38 per month. That figure for contingencies seems to me to be manifestly insufficient on a long term basis to deal with the costs every home owner incurs on a recurring basis in the upkeep and maintenance of property (even leaving aside the emergencies that occasionally arise requiring more substantial outlay such as roof repairs). Moreover, while the PTSB analysis has proceeded on the basis that Ms. Parkin’s daughter will no longer be dependent after age 23, experience shows that parents continue to have to support children after that age and this is particularly so in the years where a child is trying to establish a new career or where, as sometimes happens, a bright student will remain in university at post-graduate level for a number of years after obtaining a primary degree. In those circumstances, I believe that PTSB is taking an overly optimistic approach in suggesting that Ms Parkin will no longer have to support her daughter once she reaches 23.
60. In addition, counsel for the practitioner submitted that the very fact that PTSB was proposing to warehouse a part of the debt for a lengthy period shows very clearly that PTSB itself recognises that the debt is not affordable in the period between now and maturity of the loan. Counsel also argued strongly that one must always keep in mind the bankruptcy comparison. He acknowledged that the figures given in appendix 5 to the PIA are incorrect. However, he said that even when one takes account of the true comparison between the outcome in a bankruptcy as against the outcome under the proposed PIA, PTSB will fare significantly better under the PIA. In the case of a bankruptcy, the total assets available would be €144,000 (made up of the value of Ms Parkin’s home at €160,000 less 10% for realisation costs, 10% being the usual estimate allowed by the official assignee in bankruptcy). This would generate a dividend to the secured creditor of 43 cents in the euro. In contrast, under the terms of the PIA, the bank will recover not only the sum of €160,000 but also a further sum by way of dividend in respect of what would be treated as the unsecured element of its debts. It would also recover €14,483 in respect of the mortgage, €2 in respect of the very small loan account and €829 in respect of the credit card liabilities of Ms. Parkin. In that way, PTSB will recover a total of €175,314 which equates (on an overall basis) to a dividend of 52.5 cents. This dividend of 52.5 cents is on the basis that the total mortgage debt (€333,784) is used as the denominator rather than the entire PTSB debt of €343,785. In the context of the comparison with bankruptcy, it seems to me that, arguably, the mortgage debt is relevant as the denominator given that, in a bankruptcy, none of the unsecured debt would have any prospect of being paid. By my calculations, the relevant dividend would be 48 cents in the euro if one were simply to measure the secured indebtedness allowed under the PIA of €160,000 against the overall indebtedness to PTSB on foot of the mortgage account of €343,785. For the purposes of the bankruptcy comparison, however, it seems to me that the appropriate comparator is not 48 cents in the euro but 52.5 cent in the euro. This is almost 10 cents in the euro higher than the amount which PTSB would recover in the event of the bankruptcy of Ms. Parkin. In absolute terms, the most that PTSB would recover in a bankruptcy is €144,000 whereas, under the PIA, the bank will recover €175,314 in total. This means that the bank would recover €31,314 more under the proposed PIA than it would recover in a bankruptcy. This is a factor which must, in my view, also be borne in mind in considering the overall fairness of the proposals for a PIA here and in addressing the complaint made by PTSB in relation to the extent of the proposed write-down of the debt (which I address further in the concluding section of this judgment).
The position of Ms Parkin’s husband
61. The next point made by PTSB is that there is no evidence that Ms. Parkin has taken any steps to require her estranged husband to make payments towards the mortgage or towards the maintenance of their daughter. PTSB accepts that the fact that there are no interlocking proceedings involving Mr. Parkin is not, of itself, fatal to the application. PTSB has very properly accepted that, in JD [2017] IEHC 119, Baker J. held that a debtor is not precluded from seeking relief under s. 115A where he or she does not own the entire interest in the principal private residence or is not the sole mortgagor. Nonetheless, PTSB makes the case that there has been a failure on the part of Ms. Parkin to properly engage with Mr. Parkin such that the proposal amounts to unfair prejudice in all of the circumstances. PTSB distinguishes the present case from JD on the basis that, in that case, efforts had been made by the debtor to bring income or contribution on the part of her co-debtor into play. PTSB draws attention to what was said by Baker J. at para. 12 of her judgment in JD where she said:
“Ms. D. made application against her former husband, and a maintenance order in respect of the dependent children was made in the District Court … in the sum of €120 per fortnight, and in December, 2014 after he had ceased making payments she sought and obtained an attachment of earnings order in respect of the maintenance liability.”
62. In the same case Baker J., at para. 82, said that she could not ignore the fact that the debtor in that case had obtained an order for maintenance and an attachment of earnings order. Baker J. said that the debtor had taken “all rational steps to secure the payment of maintenance on an ongoing basis “.
63. However, in my view, it is essential to understand why it was that the issue of maintenance payments arose in JD . In that case (in common with some other cases which have recently been heard by me) a secured creditor argued that the fact that the debtor was partly dependent on maintenance payments in order to fulfil her obligations under the PIA, meant that the PIA was not sustainable. Thus, in para. 80 of her judgment in JD , Baker J. records that the secured creditor, in that case, argued that, because there was no certainty that the maintenance payments would be honoured by the debtor’s husband, there was insufficient evidence of the ability of the debtor to meet her obligations under the proposed PIA. In para. 81, Baker J. notes the point made by the creditor in that case that the debtor had previously fallen into arrears in her mortgage repayments after her former spouse ceased to pay maintenance and that there was a risk that this would happen again. It was in those circumstances that Baker J. made the observation (quoted above) in para. 82 of her judgment. Baker J was not laying down any general requirement that, in all cases involving an estranged spouse and co-debtor, the debtor is obliged to first make a claim against the co-debtor before seeking relief under the 2012 Act.
64. I do not see anything in JD to support the contention that a debtor in the position of Ms. Parkin must, if she is to seek approval of a proposed PIA, take steps against a co-debtor or seek to obtain maintenance payments for a child. Moreover, it is perfectly understandable why Ms. Parkin has not sought to pursue Mr. Parkin. It was his gambling debts that caused the insolvency of Ms. Parkin. His gambling addiction is such that he resorted to loan sharks which in turn led to the problems described by Ms Parkin in her affidavits (which I have sought to summarise in the introductory section of this judgment). He has now returned to the United Kingdom and, on the evidence available, there is nothing to suggest that he has reformed himself or that he would be a mark for a maintenance order.
65. In addition to raising the issue in relation to the non-pursuit of Mr. Parkin, PTSB has also suggested that the proposed PIA requires PTSB to ” upfront write off debt for a debtor not party to any proposed arrangement” to quote from the email from PTSB to the practitioner of 3 November 2016 (which in turn is quoted in para. 93 of the written submissions delivered on behalf of PTSB). It was not clear to me at the hearing on 3 December 2018 that PTSB was persisting with this aspect of its case. It was not pressed at the hearing. In any event counsel for the practitioner argued that there is nothing in the 2012 Act that will prevent PTSB from proceeding against Mr. Parkin, should they choose to do so. Counsel relied in this regard on s. 116 of the 2012 Act. S. 116 deals with the effect of a PIA once it has been registered in the register of PIAs maintained by the ISI. S. 116(2) makes clear that the PIA binds the debtor and also, ” in respect of every specified debt”, the creditor concerned. S. 2(1) of the 2012 Act explains what is meant by a ” specified debt “. There, it is defined in the following terms: –
“‘specified debt”, in relation to a protective certificate, means a debt that is specified in that protective certificate as being subject to that certificate;”
66. The only protective certificate that was issued in this case was the certificate issued in respect of Ms. Parkin. There was never any application made in relation to Mr. Parkin. In those circumstances, and having regard to the requirement to interpret the 2012 Act in a manner that is consistent with the Constitution, it seems to me to be clear that the effect of s. 116(2) of the 2012 Act is that the creditor (here PTSB) would only be bound by the terms of the PIA insofar as the indebtedness of Ms. Parkin is concerned. S. 116(2) would not appear to me to have any impact on the indebtedness owed by Mr. Parkin. Therefore, the PIA cannot have had the effect of reducing Mr. Parkin’s liability to the bank.
67. Furthermore, s. 116(6) makes very clear that the PIA will not in any way impede the ability of PTSB to pursue Mr. Parkin. In this context, I should explain that under s. 116(3), once a PIA is in effect, a creditor bound by it is prevented from taking any legal proceedings or enforcement steps against the debtor. Likewise, under s. 116(4) the creditor is prevented from taking bankruptcy proceedings against the debtor. However, s. 116(6) provides that neither subs. (3) nor (4) will operate in respect of a joint debtor. S. 116 (6) provides as follows: –
Nothing in subsections (3) and (4) shall operate to prevent a creditor taking the actions referred to in that subsection as respects a person who has jointly contracted with the debtor or is jointly liable with the debtor to the creditor and that other person may sue or be sued in respect of the contract without joining the debtor”.
68. In light of these statutory provisions, I can see no reason why PTSB would not be entitled to pursue a claim against Mr. Parkin, including a claim to enforce the mortgage against him. It may well transpire that if such steps are taken by PTSB, there will be an issue as to the extent of the beneficial interest of Mr. Parkin in the principal private residence. That is not an issue on which I can or should express any view at this stage. What is clear is that, even if an order is made affirming the order of the Circuit Court, PTSB will not be prevented from pursuing Mr Parkin in respect of his ongoing indebtedness to it and will not be prevented from taking enforcement proceedings in respect of any interest he may have in the family home. It will be a matter for the court in any such proceedings to determine what relief might appropriately be granted and I can neither prejudge nor predict the outcome of any such proceedings.
Ms Parkin’s pension entitlements
69. The next issue raised by PTSB relates to the pension entitlements of Ms. Parkin. PTSB makes the very valid point that it is improbable that Ms. Parkin, as an employee of the HSE does not have valuable pension entitlements. PTSB draws attention to the way in which the pay slips exhibited by Ms. Parkin to her affidavit (at Exhibit “LP 1”) include deductions for “Supern-1” which would appear to relate to superannuation. In addition, at p. 4 of the Prescribed Financial Statement (“PFS”) reference is made to deductions for “mandatory pension ” as well as income tax.
70. PTSB complains that in the Circuit Court, the learned Circuit Court Judge took the view that Ms. Parkins’ pension is: –
“For the purpose of providing her with an income on her retirement”.
71. PTSB submits that the Circuit Court was in error in taking that approach. In the first place, PTSB suggests that, taken to its extreme, any insolvent debtor could assert that any source of income is intended for one specific purpose only and so should not be taken into account. PTSB contends that insolvency: –
“..imposes particular responsibilities which cannot be skipped over in this manner”.
72. Secondly, PTSB suggests that, after retirement, it would appear that Ms. Parkin will have the benefit of both the old age pension and a separate pension associated with her HSE employment. PTSB submits that the regular old age pension adequately addresses the reasonable living expense of a single person.
73. Notwithstanding the provisions of s. 51 of the 2012 Act (dealt with in more detail below), PTSB argues that it is appropriate to have regard to pension entitlements particularly for the purposes of considering whether a debtor could afford to discharge a warehouse balance in the future. PTSB also observe that, in Paula Callaghan , Baker J. appears to have accepted the potential relevance, for warehousing purposes, of a pension payable in the future. As noted previously, at para. 81 of her judgment in that case, Baker J. said: –
“Neither of the debtors has the benefit of a pension which might provide a lump sum on retirement to deal with the warehoused amount. The repayment of the inactive account therefore is not predicated on any anticipated ability to pay in the future, and is entirely on the hazard.”
74. PTSB argue (again on the basis of what was said by Baker J. in para. 81 of her judgment in Paula Callaghan ) that a pension should not be regarded as some hypothetical source of income in the future. PTSB also strongly complains that neither Ms. Parkin nor the practitioner placed any details of Ms. Parkin’s pension entitlements before the court. PTSB argues that since Ms. Parkin has peculiar knowledge of her own pension rights, and PTSB has no such knowledge, it was incumbent on Ms. Parkin to place appropriate evidence before the court in relation to her pension entitlements.
75. In response, counsel for the practitioner strenuously argued that the approach proposed by PTSB is contrary to s. 51 of the 2012 Act. He also argued that s. 51 is consistent with the approach taken under the Bankruptcy Act 1988 where a pension will only be treated as an asset of a bankrupt if it falls into payment within a period of five years from the date of adjudication.
76. In these circumstances, it is necessary to consider the provisions of section 51. Insofar as relevant, s. 51(1) provides as follows:-
“(1) Subject to subsection (4), in relation to … Personal Insolvency Arrangements, where a debtor has an interest in or an entitlement under a relevant pension arrangement, such interest or entitlement of the debtor shall not be treated as an asset of the debtor unless subsection (2) applies.” (emphasis added)
77. S. 51 thus provides that, where a debtor has an interest in or an entitlement under a relevant pension arrangement, it is not to be treated as an asset of the debtor unless s. 51(2) applies (dealt with further below). This is stated to be the case “in relation to” a PIA. Those words “in relation to” appear, on their face, to be capable of wide application. That was the view of the Supreme Court in an arbitration context in Gulliver v Brady [2003] IESC 68. Murphy J took a similar view of the somewhat similar words ” in connection with” in the context of s. 60 of the Companies Act 1963 in Eccles Hall v Bank of Nova Scotia (High Court, unreported, 3 February, 1995).
78. “A relevant pension arrangement ” for this purpose is defined in s. 2(1) of the 2012 Act as including a range of pension entitlements such as retirement benefit schemes approved by the Revenue Commissioners, PRSA contracts, a qualifying overseas pension plan, a public service pension scheme, a statutory pension scheme other than a public service scheme and also such other pension arrangements as may be prescribed by the Minister for Justice and Equality in consultation with the Ministers for Finance, Social Protection and Public Expenditure and Reform.
79. It will be seen, therefore, that a pension scheme applicable to an employee of the HSE will readily fall within one or other of the schemes outlined in section 2(1). Section 51(1) will thus apply to Ms. Parkin’s pension entitlements.
80. It is next necessary to consider s. 51(2) which is in the following terms:-
“(2) Where this section applies and a debtor has an interest in or entitlement under a relevant pension arrangement which would, if the debtor performed an act or exercised an option, cause that debtor to receive from or at the request of the person administering that relevant pension arrangement—
(a) an income, or
(b) an amount of money other than income,
in accordance with the relevant provisions of the Taxes Consolidation Act 1997, that debtor shall be considered as being in receipt of such income or amount of money.”
81. It is clear that s. 51(2) applies where the debtor is entitled to some form of immediate access to a pension entitlement either upon exercising an option or taking some other step.
82. Section 51(2) must be read in conjunction with s. 51(3) which identifies the relevant time range during which s. 51(2) will apply. I do not believe that it is necessary to set out the text of that sub-section in full. In my view, the effect of s. 51(3) is that s. 51(2) will apply where the debtor:-
(a) is entitled to exercise an option or take some other step to obtain access to pension payments at the date of the making of the application for a protective certificate;
(b) the same applies where the entitlement arose before the date of that application; and
(c) section 51(2) will also apply where the entitlement arises within seven years and six months from the date of making an application for a protective certificate in relation to a PIA.
83. For completeness, it should be noted that under s. 51(4), there is, notwithstanding the provisions of s. 51(1)(3), an obligation on a debtor, when making an application for a protective certificate, to disclose in his or her Prescribed Financial Statement (“PFS”) any relevant pension arrangements.
84. The question which arises is whether, having regard to the provisions of s. 51, there is any scope to take the view that, when assessing the issue of affordability (and the related question of the extent of a write down of secured debt), regard can be had to future pension entitlements (i.e. entitlements that will arise more than seven years and six months from the date of application for the protective certificate). I have not been referred to any authority directly in point. As noted above, PTSB has referred to an observation by Baker J. in Paula Callaghan , but that observation does not address this specific issue. Moreover, the judgment in that case does not address the effect of s.51 of the 2012 Act. There was no need for Baker J to do so because, in that case, the debtors did not have an entitlement to a private or public service pension at any point.
85. There is also a brief reference to pension payments in my judgment in Richard Featherston [2018] IEHC 683. Ironically, in that case, counsel for the practitioner there suggested that one aspect of future means that might potentially be brought into account is where the debtor has a pension provision which will be payable at retirement age. In that case, as para. 51 of my judgment records, counsel distinguished such an asset (which was relatively certain) from hypothetical receipts at some stage in the future which were entirely uncertain. However, as in the case of Paula Callaghan , s. 51 was not addressed in the course of argument in that case and was not considered by me in my judgment.
86. In the written submissions delivered on behalf of PTSB, the case is made that s. 51 should be read as confined to the period of the PIA itself. PTSB submits that, for the purposes of assessing affordability, s. 51 was not intended to exclude pension payments payable in the future long after the PIA has come to an end. PTSB argues that s. 51 does not affect the issue as to whether discharging a warehouse balance in the future would be affordable. Its case is that a future pension pot is only excluded in relation to payments which are to be made during the course of the PIA. I have to say that, while this argument was advanced by PTSB, it was not supported by any detailed analysis of the Acts or of the provisions of s 51. Nor did it address how those provisions should be construed against the backdrop of the scheme of the Acts as a whole. It is crucially important to consider the Act as a whole. For example, it would be necessary to hear submissions in relation to the interplay between s. 51 on the one hand and s 121 on the other. Under s 121, the court is given power in certain circumstances, to reverse excessive payments made into a pension fund in the three year period prior to the grant of a protective certificate. At first sight, it is difficult to see why that provision would have been considered to be necessary if proposals for a PIA were required to take into account the value of future pension payments payable long after the term of the PIA.
87. PTSB also drew attention to the obligation under s. 51(4) requiring a debtor to disclose, in his or her PFS, any pension entitlements and argued that this must mean that there is no blanket prohibition on taking such entitlements into consideration on the issue of future affordability (i.e. after expiry of the PIA and after the expiry of the periods prescribed by s. 51(3)). At first blush, it may appear curious that such a provision should exist if pension entitlements payable outside the time periods prescribed by s 51(3) are not to be treated as assets of a debtor. Nonetheless, I do not believe that much reliance can be placed on s 51(4). On reflection, it is understandable that a debtor should be required to disclose pension arrangements in the PFS. This is important so that, for example, an assessment can be made as to whether the arrangements in question could be said to fall within the ambit of a ” relevant pension arrangement ” as defined. It is also important to bear in mind that not all pension arrangements are excluded by s 51(1). It is accordingly necessary that all pension arrangements should be disclosed so that appropriate enquiries can be made as to whether any of the provisions of s 51(2) could be said to apply.
88. Furthermore, although counsel for the practitioner at the hearing argued strongly that the language of s. 51(1) contained a clear prohibition on any attempt to treat a pension entitlement as an asset of a debtor (unless s 51(2) applied), there was no significant engagement with that argument on the part of PTSB. This causes me concern particularly in circumstances where, as noted above, the words ” in relation to ” as used in s. 51(1) are on their face of wide import. On their face, those words tend to suggest that, even in the context of the affordability requirement contained in s. 115A(9)(b)(ii), Ms Parkin’s future pension entitlements are not to be treated as her assets. After all, the question of affordability is an issue that must be considered in relation to a PIA.
89. On the basis of the limited arguments heard by me, I have come to the conclusion that the submissions of the practitioner are correct and that, on the basis of the language of s 51(1), a pension arrangement is excluded from the court’s consideration under s 115A unless s 51(2) applies. Given Ms Parkin’s age, there is no basis on which s 51(2) could be said to apply here. In my view, if a different view is to be taken, it would be necessary to have more extensive and detailed argument addressed to this issue than I have heard in this case. I wish to make it very clear that I do not rule out the prospect that the court could be persuaded to take a different view. There may well be cogent arguments that could be made. If no regard whatever can be had to pension entitlements payable in the future (i.e. outside the period prescribed by s. 51(3)), there could, conceivably, be grotesque consequences in a particular case. For example, it would mean that no regard could be had to a very large pension pot (for example, one predicted to reach, by retirement age, the maximum value permitted for tax purposes by Revenue).
90. The proper interpretation of s 51 is therefore a question of very significant importance that, in my view, calls for more comprehensive consideration and debate than I have heard in this case. All that I can say at this point is that I have not been persuaded on the basis of the arguments made by PTSB in this case that I am entitled to have regard, in assessing affordability, to Ms Parkin’s pension entitlements. On the face of it, s. 51(1) appears to me to have that effect.
The Constitutional dimension
91. As noted above, PTSB has emphasised the constitutional dimension. PTSB contends that the write-down of the secured debt to the current market value of the principal residence is draconian. As noted above, PTSB submits that, consistent with Heaney v. Ireland , the court must consider whether the write-down impairs the rights of PTSB as little as possible. It is also submitted that the court must consider whether an alternative exists which is less intrusive.
92. However, it is important to bear in mind that the proportionality test formulated by Costello J (as he then was) in Heaney arose in the context of a challenge to the constitutionality of a legislative provision. There is no such challenge here. I must also bear in mind that the Oireachtas in enacting the 2012 Act has expressly invoked the interests of the common good. This is clear from the long title to the 2012 Act and the express objectives set out in the recitals. The recitals make clear that the Oireachtas considers that it is in the interest of the common good that:
(a) the difficulties experienced by debtors as a consequence of insolvency should be ameliorated. It is clear from the recitals that the amelioration of such difficulties is regarded as being important for the purpose of minimising the adverse consequences of significant indebtedness for economic activity in the State.
(b) The needs of creditors to recover debts due to them by insolvent debtors is also recognised in the recitals to be in the interests of the common good. This is expressly stated to be subject to “the extent that the means of those debtors’ reasonably permits” which seems to me to show very clearly that the Oireachtas was attempting to balance potentially conflicting rights in a proportionate way.
(c) The recitals also acknowledge the necessity to enable insolvent debtors to resolve their indebtedness (including by obtaining a determination that they stand discharged from their debts in certain circumstances) in an orderly and rational manner without recourse to bankruptcy. Again, the objective of such measures is to facilitate the active participation of persons in economic activity in the State.
93. Insofar as s. 115A is concerned, it was inserted by the 2015 Act. The 2015 Act does not contain any long title. However, since it is inserting new provisions into the 2012 Act, it must follow that the Oireachtas, in enacting the 2015 Act, believed that it was still acting with a view to promoting the common good objectives expressly invoked in the 2012 Act. The underlying purpose of s. 115A was identified as follows by Baker J. in JD at para. 32:
“… the amending legislation by which was added s. 115A, affords the far-reaching power of the court to approve a PIA notwithstanding its rejection by creditors. The public interest is in is the maintenance of a debtor’s occupation and ownership of a principal private residence. That social and common good is concretely referable to the continued occupation by a debtor of a principal private residence, and the power contained in the section is limited by the fact that only those persons who had a relevant debt secured over his or her principal private residence which was in arrears as defined by s. 115A(18) on 1st January, 2015 could avail of this exceptional remedy. The statutory provision then must be seen as a limited protection of persons whose mortgage payments on their principal private residence fell into arrears at the height of the financial crash. Absent a ‘relevant debt’, a debtor may not seek to engage the jurisdiction of the court to overrule the result of a creditors’ meeting …”
94. In para. 34 of her judgment, Baker J. clarified that s. 115A does not have, as its focus, the continued ownership or a debtor of the family home, but is concerned with the continued occupation of the home. She also said in the same paragraph:
“… the section is concerned with enabling a debtor not to dispose of an interest in a property, rather than positively stated as enabling the debtor to continue to own the property. Thus, the perceived public interest in the continued occupation of a premises is not a focus on the acquisition of a capital asset, but rather the preservation of a right to live in a premises.”
95. Those observations of Baker J. have particular resonance in present circumstances where homelessness has become all too prevalent.
96. In circumstances where the Oireachtas, in enacting the 2012-2015 Acts, was acting in the interests of the common good, and in circumstances where the Oireachtas has also sought to balance the interests of the common good against the rights of creditors, I do not believe that it would be appropriate for the court (in the absence of a constitutional challenge to the provisions of the Acts) to add some new test to s. 115A which is not there already. In this context s. 115A already contains very significant statutory checks and balances to ensure that the interests of creditors are appropriately considered in any application under s. 115A. Thus, for example the court is required under s. 115A (9)(b) (ii) to be satisfied that there is a reasonable prospect that confirmation of the proposed PIA will ” enable the creditors to recover the debts due to them to the extent that the means of the debtor reasonably permit”. In addition, the court is not permitted to make an order under s. 115A unless it is satisfied (as required by s. 115A (9)(e)(f)) that the proposed PIA is fair and equitable in relation to each class of creditors that has rejected the proposals and the court must also be satisfied that the arrangement is not unfairly prejudicial to the interests of any interested party (which would, of course, include the creditors).
97. Furthermore, save in cases involving a single class of creditors, the court is required by s. 115A (9)(g) to be satisfied that at least one class of creditors has accepted the arrangement. This is a very important provision because it provides a measure of reassurance to the court that at least one class of creditors regarded the arrangement as commercially acceptable.
98. In addition, as Baker J. has already highlighted in JD , the section only applies to a very limited class of debtor – namely those debtors who were in arrears with payments on a home loan mortgage as of 1st January, 2015 (or who had been in arrears prior to that date but had entered into an alternative repayment arrangement with the secured creditor concerned). As Baker J. explained, this is clearly intended to cover debtors who fell into arrears at the height of the financial crash.
99. It therefore seems to me that, when considering an application under s. 115A, the court is confined to a consideration of the specific provisions of s. 115A which include, within them, a number of important safeguards for the protection of creditors including an overall requirement of fairness, a prohibition on unfair prejudice to any individual creditor, and also a requirement that the claims of creditors should be met to the extent that a debtor’s means permit. Of course, as the decisions of Baker J. make clear, the court must always bear in mind that s. 115A represents a significant intrusion into the property rights of creditors and that, in those circumstances, the court must be careful, on an application under s. 115A, to ensure that all of its provisions have been appropriately complied with. The court has no power to dis-apply any of the provisions of s. 115A.
Conclusions
100. I have already set out my conclusions in relation to a number of the issues which were debated in the course of the hearing, namely (a) the treatment of the credit union as a separate class of creditor; (b) the position of Mr Parkin as a joint and several debtor; (c) Ms Parkin’s pension entitlements; and (d) the Heaney v Ireland argument. I set out, below, my conclusions in relation to the balance of the issues that arise.
101. As noted above, PTSB makes complaint in relation to the extent of the write-down of the secured debt to the current market value of the principal private residence of the debtor and also strongly argues that Ms Parkin’s circumstances show that she can afford to pay more than the amounts contemplated under the proposed PIA. In addition, PTSB contends that warehousing is appropriate here given Ms Parkin’s expected future means especially after her daughter moves from college to employment.
Conclusion on warehousing
102. I deal, in more detail below, with the issues that arise in relation to the write-down of the secured debt. In so far as the warehousing issue is concerned, I have come to the conclusion that warehousing would not be appropriate in this case. I have formed that view for a number of reasons. In particular, I am concerned that the form of warehousing proposed by PTSB here envisages a very large debt crystallising at Ms Parkin’s retirement age. I believe that counsel for the practitioner is correct in his submission that, as in the Paula Callaghan case, this has the capacity to result in Ms Parkin’s insolvency as of the date of her retirement. That seems to me to undermine a very important goal of the 2012-2015 Acts namely the objective to resolve indebtedness and restore a debtor to solvency. It would also put Ms Parkin’s ability to remain in her home in serious jeopardy.
103. I am, of course, mindful of all of the submissions which have been made in relation to Ms Parkin’s means (which I accept are relevant in a warehousing context). However, for reasons which I address further below, I am concerned that, in the course of the proceedings in the Circuit Court, neither the practitioner nor Ms Parkin had adequate notice of the extent of the case now made by PTSB in relation to the issue of Ms Parkin’s means.
104. I have also come to the conclusion that PTSB, in the detailed calculations set out in its written submissions in this court, has failed to take account of the fact that the “surplus” (which it is suggested is likely to arise in the future) is based on the assumption that everything above the ISI reasonable living expenses can be treated as surplus to Ms Parkin’s needs. In my view, it is a fallacy to suggest that the ISI reasonable living expenses can be treated as a reliable indicator of the expenses that an adult is likely to incur over the course of a lifetime. As explained in para. 59 above, those guidelines are designed to address the position of a debtor over the course of a limited time period. They do not address the more extensive lifetime expenses that arise over longer periods in the life of an adult. Thus, the approach advocated by PTSB fails to take account of expense items such as the examples cited in paras. 42 and 59 above.
105. Nor does the approach suggested by PTSB pay sufficient attention to the uncertainties that inevitably arise when seeking to predict what may happen in the future. As Baker J emphasised in Paula Callaghan , a warehousing solution would only be appropriate where the court can be satisfied that there is sound evidence available that it is likely to be achieved.
106. I have therefore come to the conclusion that, in this particular case, warehousing would not be appropriate. I have also come to the conclusion that, in the circumstances, the practitioner was justified in ruling out a warehousing proposal (even though the practitioner was mistaken in thinking that any form of warehousing was impermissible under the Acts).
The proposed write down
107. In the context of the write-down, PTSB makes the point that, in common with many other cases, too little detail is provided by the practitioner regarding Ms Parkin’s future means and expenditure. I share that concern. Based on my experience to date in dealing with these case, I am of the view that, too often, much of the affidavit evidence is in standard form and does not concentrate (as it should) on the individual circumstances of the debtor. PTSB refers in this context to para. 9 of the practitioner’s affidavit sworn on 18th May, 2017 which I have quoted in para. 44 above.
108. I agree with the observation made in para. 49 of PTSB’s written submissions where they say that this passage is not easy to understand. If anything, that observation is an understatement. With due respect to the practitioner, para. 9 is entirely lacking in clarity. Regrettably, it is in similar form to averments which I have seen in several other cases. It appears to proceed on the basis that any write down to a figure greater than market value is, in some unspecified way, arbitrary or uncertain. In my view, that is based on a mistaken understanding of the legal position. As Baker J explained in Laura Sweeney , at para. 54, the appropriate capital mortgage figure is to be assessed in the light of the repayment capacity of the debtor. In the same case, at para. 56, Baker J made clear that a write-down of a mortgage debt to market value is not mandated by the Acts and that the extent of any write-down is to be measured by reference to the affordability of payment. There is nothing arbitrary or uncertain involved in working out, by reference to a debtor’s net income and recurring and expected expenses (including an appropriate allowance for contingencies), the level of monthly mortgage payment which that debtor can reasonably afford. Once that figure is identified, it should be a relatively straightforward exercise to assess the capital sum which can be paid over the term of the mortgage and this, in turn, will provide a reliable basis on which to calculate the extent of any write-down. Thus, in the present case, Ms Parkin’s net monthly income provided the base line against which the relevant calculation can be made.
109. I also agree with PTSB that there can be no question of any automatic write-down of a mortgage debt to the value of the underlying security. Section 102(2) makes clear that the value of the security is a “floor” beneath which the proposals must not go. It provides that, where a proposed PIA envisages the retention by a secured creditor of security and also a reduction in the principal sum due in respect of the secured debt, then, in the absence of agreement on the part of the secured creditor, the principal sum cannot be reduced below the value of the security determined in accordance with s. 105. That is an extremely important protection for secured creditors and is undoubtedly informed by respect for the property rights of such creditors.
110. Nor is s.102(2) intended to be a ceiling. As the judgments of Baker J make clear, the extent of any write down of secured debt is related to affordability. If one can predict that, on the conclusion of a PIA, the debtor will have sufficient means to continue to make significant mortgage repayments to a level beyond the current value of the secured property, it is difficult to see that it could be appropriate to write down the quantum of the secured debt to the current value of the property. It is important that practitioners should not use the s. 105 value as some unofficial rule of thumb that can be applied in all cases without a proper analysis of a debtor’s means.
111. Counsel for the practitioner rejected the suggestion that the proposed write-down was the most draconian outcome for PTSB here. He emphasised that, as Appendix 6 to the proposal clearly shows, bankruptcy would represent a worse outcome. In a bankruptcy, the costs of the forced sale would reduce the net receipts from the secured property to €144,000. He also said that, in reality, PTSB is no more than an unsecured creditor in relation to the balance over and above the current market value. This is for the very simple reason that if there was a forced sale of the property now, the most that PTSB could in fact recover is the market value (less the costs of sale). Even if there was no bankruptcy and PTSB were to take proceedings to enforce its mortgage over the property, it would ultimately receive less than market value given the costs of such proceedings and the costs of sale.
112. Counsel for the practitioner also stressed that, under Clause 37 of the PIA, PTSB will remain protected in the event of a sale of the home in the future at a value greater than €160,000. Clause 37 essentially provides that a secured creditor is entitled to a clawback in the event that the secured property is sold within twenty years from the date the PIA comes into effect for an amount greater than the reduced principal sum (written down pursuant to the PIA). The secured creditor will get the benefit of an increase in value notwithstanding that, in the meantime, the secured debt has been written down to the market value of the property at the time of the PIA.
113. In my view, the arguments that have been made by the practitioner are more relevant to the issue of fairness and unfair prejudice than to the issue of the write down. On the other hand, as explained in paras. 103-104 above, the arguments that have been advanced on behalf of PTSB are based on the mistaken premise that Ms Parkin will have substantial surplus income after her daughter finishes college. PTSB has failed to appreciate that the ISI reasonable living expenses are not an appropriate measure of living costs on a long term basis. PTSB also failed to appreciate that recurring expenses must also include an allowance for contingencies. I accept that it may not be possible to scientifically assess what should be allowed for contingencies. On the other hand, saving or setting aside an amount on a monthly basis to provide for larger expense items that may arise in the future is a normal feature of life and I do not believe that it should give rise to any significant difficulty, in practice, in estimating what would be reasonable. What is clear is that the figure for savings and contingencies measured by the ISI would not be appropriate on a long term basis.
114. I recognise and fully understand that PTSB feels aggrieved that the affidavits filed on behalf of the practitioner and Ms Parkin in the course of the Circuit Court proceedings could have provided more detail about Ms Parkin’s likely income and expenditure in the future. Nonetheless, I have come to the conclusion, with some hesitation, that there is just about enough evidence available in the terms of the PIA itself to allow the court to extrapolate that Ms Parkin is unlikely to be in a position to afford a larger monthly mortgage payment and to accordingly conclude that the proposed write-down is not excessive.
115. In expressing this view, I wish to make it very clear that, in future cases, it will be important that practitioners should not rely on general or template averments and should instead provide clear evidence as to how the write-down has been calculated. That is likely to require a practitioner to carry out an exercise of the kind suggested in para. 108 above.
116. In arriving at my conclusion on this issue, I am also concerned that the practitioner and Ms Parkin may not have properly understood, in advance of the hearing in the Circuit Court, the extent to which PTSB was exercised about the nature of the evidence as to her means. Certainly, the foundation for the argument made on behalf of PTSB at the hearing before me was not comprehensively laid down in the materials which PTSB put in evidence in the Circuit Court.
117. In this context, while I am very definitely of the view that the practitioner, in a case of this kind, has the obligation to demonstrate that a proposed write-down of secured debt is objectively justifiable, I have come to the conclusion that it would be inappropriate to hold that the practitioner has failed to discharge that obligation in this case.
118. It seems to me that, in the notice of objection filed on behalf of PTSB in the Circuit Court on 9th December, 2016, the focus of the objections related, not to the write-down of the debt, but to the alleged failure to address the warehousing proposal made by PTSB. This is clear from a consideration of paragraphs 3 and 4 of the notice of objection. This is reinforced by a consideration of the grounding affidavit of Terence Smith. The warehousing proposal made by PTSB is the subject of paragraphs 12-18 of that affidavit (which is the longest individual section of the affidavit).
119. It is true that, in paragraph 6 of the notice of objection, the write-down of the debt is signalled as an issue in the context of the fairness of the proposed PIA. However, the issue is not addressed in Mr Smith’s affidavit in the way in which the issue has been canvassed in this court. There are 25 paragraphs in that affidavit. As noted above, paras. 12-18 deal with warehousing. Paras. 7-9 deal with the creditor class issue; paras. 5-6 deal with the timing of PTSB’s notice of objection; and paras. 19-10 dealt with Ms Parkin’s employment. The write-down was addressed in paras. 10-11 but, as explained in paras. 121-122 below, the objection was focused on a contention that the market value was out of date, not on a failure to show that Ms Parkin did not have the means to afford any lesser write-down.
120. Paragraph 7 of the notice of objection (which also addresses the question of means) concentrates on the joint borrowings issue and does not contain any hint of the argument now so strongly and comprehensively made in this court in relation to the alleged failure of the practitioner to address, in a meaningful way, Ms Parkins means in the period after the termination of the PIA.
121. In the affidavit of Terence Smith, sworn subsequently in March 2017, the write down is dealt with in two paragraphs (namely paragraphs 10-11). Crucially, the objection is framed in the following terms in paragraph 11: –
“While it is not apparent that any evident justification has been furnished for a write-down in this quantum, the reason for choosing the figure would appear that the PIP proposed that the mortgage be written down to the current negative equity value of €160,000. The valuation of the security was agreed with the objecting creditor. Given recent developments in the property market in Dublin, it is likely that this sum is very conservative and a valuation undertaken today, would probably exceed this sum. Furthermore, the Rejected Arrangement envisages this upfront write-down, unfairly prejudices the Objecting Creditor and is unfair and inequitable, in circumstances where the write-down contained therein, would now have the effect that the live balance leftover is likely to be less than the current market value for the property, given the recent uplift in values. This would be particularly unfairly prejudicial to the Objecting Creditor and I am advised that this provision may be contrary to the legislation, in particular Section 103 of the Act”.
122. It will be observed that para. 11 is focused not on a principled objection to the write-down or on a failure of the practitioner to justify the write-down, but instead is focused on a contention that property prices have risen since the valuation of the security was agreed between the practitioner and PTSB. In my view, that does not signal in any way the contentions now made by PTSB in the course of the hearing before me. In fact, when one reads paragraphs 10-11 in conjunction with paragraph 12 and the following paragraphs of the affidavit, it would appear that PTSB was linking the argument in relation to the write-down with the case it made that warehousing was the appropriate course to take.
123. My concern is that, when the notice of objection is read with the affidavit of Terence Smith, the practitioner in the course of the Circuit Court proceedings would have had no proper understanding of the nature of the case that PTSB subsequently made. Had such a case been signalled appropriately in the notice of objection and grounding affidavit of Mr. Smith, the practitioner would then have been in a position to place more extensive evidence before the Circuit Court to demonstrate more clearly that the write-down of the secured debt to current market value was appropriate in Ms Parkin’s circumstances. On the basis of Mr. Smith’s affidavit, the practitioner would have been led to believe that the focus of the objection in relation to the write-down was the unsubstantiated suggestion made in paragraph 11 of Mr. Smith’s affidavit that recent developments in the property market in Dublin meant that it was likely that the valuation of €160,000 represented an undervalue as of March, 2017. Given the very general and unsubstantiated way in which this was put forward by PTSB (without any reference to the specific market in the Ballyfermot area), it is unsurprising that the practitioner did not respond to it in detail. More importantly, the practitioner is likely to have been lulled into thinking that PTSB’s concern in relation to the alleged rise in property values was the basis for its objection to the write-down.
124. The affidavit evidence provided by PTSB also fell short of making the case (now made so strongly in the course of the submissions before me) that the practitioner was relying on wholly unsupported and general averments of a template nature. Had such a case been signalled by PTSB in its notice of objection and affidavit evidence, the practitioner would have had an opportunity to deal with that case in the course of the Circuit Court hearing and to place appropriate evidence before the Circuit Court in response.
125. In making these observations, I do not wish, in any way, to suggest that the onus of proof lies on PTSB. For the reasons already addressed above, I am of the view that the onus lies on the practitioner in an application of this kind to satisfy the Court that all of the requirements of Section 115A have been met (including the requirement that the Court must be satisfied that the terms of the PIA are not unfairly prejudicial to the interest of any interested party and that the proposed arrangement is fair and equitable to each class of creditor). My concern is with basic procedural fairness. The 2012 Act envisages that an objecting creditor will lodge a notice of objection. This is made clear by Sections 112(3) and 115A(3) of the Act. In my view, the submissions which PTSB have addressed to me in relation to the obligation of the practitioner to make out his case are also relevant to a notice of objection on the part of an objecting creditor. To my mind, the objecting creditor must set out its objection with clarity so that it can be appropriately addressed by the practitioner (or the debtor as the case may be) in advance of the first instance hearing. It is unsatisfactory that arguments are subsequently made which have not been appropriately and fully signalled in advance so that all sides will be in a position to place appropriate evidence before the Court to address the issues in an informed way.
126. In the circumstances outlined above, I have come to the conclusion, on the issue of the write-down of the debt and the related issue of the extent of Ms Parkin’s means, that it would not be appropriate in this case to hold that there is insufficient evidence before the court to justify the write-down proposed. As explained in para. 114 above. I believe that there is just about enough evidence available to the court to permit me to reach the view that the write-down is not excessive in Ms. Parkin’s particular circumstances.
Fairness and unfair prejudice
127. In circumstances where (a) the outcome for PTSB, as a secured creditor, is significantly better under the proposed PIA than in a bankruptcy; (b) PTSB will have the protection of clause 37 (in the event that the home is sold at a value that exceeds the agreed market value); and (c) PTSB will remain free to take action against Mr Parkin, I am satisfied that the proposed PIA will not be unfairly prejudicial to PTSB. I am also satisfied that the proposed PIA is fair and equitable in relation to each class of creditor.
Decision
128. I do not propose here to separately enumerate each of the other requirements of s 115A. I confirm that, having considered all of the material before me, I have reached the conclusion that all of the requirements of s. 115A have been satisfied. I will accordingly dismiss the appeal of PTSB and affirm the order of the learned Circuit Court Judge. I will hear the parties in due course as to any consequential orders that may be required.
Re: Leonard O’Hara
(a debtor):
v Re: Noeleen O’Hara (a debtor)
unreported
[2019] IEHC 96
Mr. Justice Denis McDonald
February 25, 2019
In the Matter of Part 3 Chapter 4 of the Personal Insolvency Acts 2012-2015 and In the Matter of Leonard O’Hara (A Debtor) and In the Matter of Noeleen O’Hara (A Debtor) and In the Matter of an Application Pursuant to Section 115A(9) of the Personal Insolvency Act 2012
JUDGMENT
1. This judgment deals with a preliminary issue which has arisen in the context of two appeals from the Circuit Court. In both of the above cases, an application was made to the Circuit Court under s.115A(9) of the Personal Insolvency Act 2012 (“ the 2012 Act ”) (as amended) seeking an order confirming the coming into effect of proposals for a Personal Insolvency Arrangement (“PIA”) . The applications (which are interlocking) are made by a husband and wife in respect of their debts and they came on for hearing in the Circuit Court on 25th October, 2012 before Her Honour Judge Mary Enright sitting at Tullamore Circuit Court. In both cases, the learned Circuit Court judge refused the application and upheld the objection of the objecting creditor, Pepper Finance Corporation (Ireland) DAC (“ Pepper” ).
2. The preliminary issue which arises (and which was the basis for the decision of the learned Circuit Court judge) relates to whether the personal insolvency practitioner in this case, Mr. Niall Moran, (“ the practitioner ”) was entitled to rely on the provisions of s. 111A of the 2012 Act for the purposes of the application under section 115A. In this context, it should be noted that s.115A permits the court to confirm the coming into effect of a proposed PIA notwithstanding that the proposal has been rejected by a majority of the creditors of a debtor. There are a number of conditions that must be satisfied for this purpose. Among the conditions which must be satisfied is the requirement laid down in s. 115A(9)(g) that the proposal has been accepted by at least one class of creditors. There is an exception to this requirement where the proposal is one to which s. 111A applies. As the opening words of s. 111A(1) make clear, s. 111A applies where there is only one creditor entitled to vote at a creditors’ meeting.
3. In the present case, on the evidence before the Circuit Court, it is clear that there were at least two creditors who were entitled to vote at the meetings of creditors. However, one of them did not return a proxy form to the practitioner and therefore did not exercise a vote at the meetings. The issue which now arises (and which was debated before me at a hearing on 10th December, 2018) is whether the 2012 Act can be interpreted as permitting s. 111A to be invoked in the circumstances which I have just described.
4. In the course of the hearing before me, counsel for both parties were agreed that, on a literal construction of the 2012 Act, the practitioner would not be entitled to rely on s.111A. However, counsel for the practitioner has sought to make the case that a literal interpretation of the relevant provisions of the 2012 Act leads to an absurdity such that the court is entitled to apply the approach authorised by s. 5 of the Interpretation Act 2005 in accordance with the test set out by Clarke J. (as he then was) in Irish Life and Permanent Plc v. Dunne [2016] 1 I.R. 92.
The relevant provisions of the 2012 Act (as amended)
5. Before turning to the facts of this case, it may be helpful, in the first instance, to identify and examine the relevant provisions of the 2012 Act (as amended).
6. The first provision which is relevant is section 98(2). It provides that a practitioner may request a creditor to file a proof of debt (in which case the proof of debt provisions of the Bankruptcy Act 1988 apply.)
7. Section 98(2)(b) sets out the consequences for a creditor who does not comply with a request by a practitioner to prove the relevant debt. Section 98(2)(b) provides as follows:
“Subject to paragraph (c), a creditor who does not comply with a request under paragraph (a) is not entitled to—
(i) vote at a creditors’ meeting, or
(ii) share in any distribution that may be made under the Personal Insolvency Arrangement concerned.”
8. It will therefore be seen that, where a practitioner has required creditors to prove debts, the only creditors who will be entitled to vote at a meeting of creditors are those who have in fact proved their debts. In the present case, the practitioner required creditors to submit proof of debt.
9. Sections 106 to 108 of the 2012 Act deal with the calling of creditors’ meetings by a practitioner. Section 106(1) requires the practitioner to notify the creditors of the holding of a meeting to consider the proposals for a PIA. Section 106(2) requires the practitioner to give fourteen days written notice of the meeting.
10. Sections 108 to 111 deal with the holding of the meeting. Section 108(8) (as inserted by s. 15(b) of the 2015 Act) provides that, where no creditor votes at a creditors’ meeting, the proposed PIA is deemed to have been approved.
11. Section 110(1) deals with the outcome of the vote at a meeting of creditors. It provides that a proposed PIA will be considered to have been approved at a creditors’ meeting where:-
“(a) creditors representing not less than 65 per cent of the total amount of the debts due to the creditors participating in the meeting and voting have voted in favour of the proposal,
(b) creditors representing more than 50 per cent of the value of the secured debts who are-
(i) entitled to vote, and
(ii) have voted,
as secured creditors have voted in favour of the proposal, and
(c) creditors representing more than 50 per cent of the amount of the unsecured debts who—
(i) are entitled to vote, and
(ii) have voted,
at the meeting as unsecured creditors have voted in favour of the proposal.”
12. Section 111 provides that the Minister may make regulations relating to the holding of creditors’ meetings including regulations in relation to the appointment of proxies. On 30th August, 2013, the Minister made the necessary regulations namely the Personal Insolvency Act, 2012 (Procedures for the Conduct of Creditors’ Meetings) Regulations 2013 (S.I. No. 335 of 2013) (“ the 2013 Regulations ”).Regulation 7(1) of the 2013 Regulations provides that votes at a meeting of creditors may be given either personally or by proxy. Regulation 7(2) provides that every notice summoning a meeting of creditors must be accompanied by a form of proxy which is to be completed in writing by the creditor.
13. Regulation 7(4) provides that each proxy is to be delivered to the office of the practitioner no later than 4 pm on the last working day before the day scheduled for the holding of the meeting.
14. Regulation 8 provides that, where a creditor abstains from voting at a creditors’ meeting, this is not to be counted as a vote by such creditor.
15. Prior to the enactment of s.17 of the 2015 Act (which inserted s. 111A) there was no provision in the 2012 Act which dealt with a situation where there was only one creditor who was entitled to vote at a creditors’ meeting. However, s. 111A has now been inserted into the 2012 Act. As noted above, under s. 111A(1)(b) where only one creditor is entitled to vote at a creditors’ meeting, then s. 111A will apply. It is important to have regard to the relevant language of s. 111A(1) which is in the following terms:-
“(1) Where —
…
(b) only one creditor would be entitled to vote at a creditors’ meeting held under this Chapter …,
the procedures specified in this section, and not those specified in sections 106 and 108 to 111, shall apply in relation to the approval by that creditor of the proposal for a Personal Insolvency Arrangement.”
16. In cases to which s. 111A applies, s. 111A(2) sets out that the practitioner is to give written notice to the creditor (i.e. the only creditor entitled to vote) that the proposal for a PIA has been prepared and the creditor then has (in accordance with s.111A(6)(a) of the 2012 Act) a period of fourteen days in which to notify the practitioner in writing of his or her approval or otherwise of the proposal.
17. Under s. 111A(7) a proposal for a PIA (to which s. 111A applies) will be considered to have been approved by the creditor where the creditor notifies the practitioner of the approval. In cases where the creditor fails to notify the practitioner in writing of his or her approval or otherwise of the proposal, s.111A(7)(b) provides that the proposal will be deemed to have been approved by the creditor concerned.
18. I observe that the entire structure of s. 111A is predicated on the existence of only one creditor with an entitlement to vote at a creditors’ meeting. In such cases, the practitioner does not proceed to call a meeting of creditors under s. 106. Instead, s. 111 directs the practitioner to give notice of the proposal for the PIA to the sole creditor and that creditor then has a period of 14 days to decide whether or not to approve the proposal.
19. As noted above, a different regime exists where there is more than one creditor with an entitlement to vote – namely the regime described in paras. 9-11 above. In such cases, the practitioner (once the debtor has consented) is required by s. 106(1) to convene a meeting of creditors. There is no statutory provision which allows the practitioner to dispense with the holding of such a meeting if only one of the creditors, so entitled, decides to exercise its entitlement to vote. Nor is there any provision to enable the practitioner to deem that the s 111A regime should apply in such cases.
20. Section 111A must also be read in conjunction with s. 115A (which was inserted into the 2012 Act by s. 21 of the 2015 Act). Under s. 115A(2), an application under s.115A cannot be made later than fourteen days after the creditors’ meeting or (in cases to which s.111A applies) within fourteen days from the receipt by the practitioner of the notice of the creditor concerned. As noted above, under s. 115A(9)(g), it is necessary that at least one class of creditors has approved the proposed PIA by a majority of over 50% of the value of the debts owed to that class “ other than where the proposal is one to which s.111A applies”.
21. There are a number of other references within s.115A to s.111A. These include:
(a) subs. (2)(a)(ii) which sets out a requirement as to what should be included in the certificate to be furnished by the practitioner under subs. (2)(d). This is stated to apply in cases “ other than where the proposed Personal Insolvency Arrangement is one to which s.111A applies”;
(b) subs. (2)(d) also deals with the contents of the certificate to be given by the practitioner. It is expressly stated in subs. (2)(d)(ii) that:
“where applicable, stating that s.111A applies to the proposal and that the creditor concerned has notified the …practitioner under s.111A(6) that the creditor does not approve of the proposal…”;
(c) subs. (15)(b) provides that the court may accept the certificate of the practitioner under subs. (2)(d): “ as evidence that the proposed Arrangement has not been approved in accordance with s.111A…”;
(d) subs. (16) sets out what is meant by a proposal for a PIA that has not been approved in accordance with Chapter 4. Subsection (16)(b) provides in particular:
“In the case of a proposal for a Personal Insolvency Arrangement to which s.111A applies, the creditor concerned has notified the Personal Insolvency Practitioner in accordance with s.111A(6) that the creditor does not approve of the proposal….”.
22. It will thus be seen that the Oireachtas, in enacting the 2015 Act, inserted elaborate provisions into the 2012 Act dealing with circumstances where only one creditor was entitled to vote at a meeting of creditors. The insertion of s. 111A into the 2012 Act required a significant number of consequential provisions to cross-refer to the new regime brought about by s. 111A in order to address those cases where there is only one creditor with an entitlement to vote.
23. In the course of the hearing before me, counsel for Pepper submitted that the effect of the statutory provisions discussed above was clear. In short, where a practitioner requires creditors to prove their debts, s. 98(2)(b) has the effect that any creditor who fails to submit a proof of debt will have no entitlement to vote at a meeting of creditors. However, where more than one creditor submits a valid proof of debt, the relevant provisions which are engaged are ss. 106-111. In such cases, the practitioner will be obliged to call a meeting of creditors under s. 106 and there is no scope to apply the provisions of s 111A even where, of those entitled to vote, only one creditor submits a form of proxy for the purposes of that meeting.
24. Counsel for Pepper submitted that it is clear from the language of s. 111A that it will only apply where the practitioner has prepared a proposal for a PIA and only one creditor would be entitled to vote at a creditors’ meeting. He drew attention to the way in which the notice to be sent to the creditor in that case is different to the notice to be sent under section 106. Under s. 111A(2)(a), the practitioner is required to give written notice to the creditor that the proposal for a PIA has been prepared and that the creditor may within the period specified in s. 111A(6) (namely the period of fourteen days from the date of the notice) notify the practitioner in writing of his or her approval or otherwise of the proposal.
25. In the case of a notification under s. 106, the notice to be given is fourteen days written notice of the meeting and the date on which, and time, and place at which, the meeting will be held.
26. Counsel for Pepper submitted that, in circumstances where (as discussed in more detail below) there were two creditors who proved their debts under s. 98, the only notice that could lawfully be given by the practitioner under the 2012 Act was notice of the holding of a creditors’ meeting. There was no scope under the Act for the practitioner to trigger the s. 111A procedure in such cases.
27. Furthermore, counsel drew attention to what actually happened in this case. A notice was, in fact, sent by the practitioner convening a meeting of creditors under section 106. It was only subsequently (i.e. after only one creditor voted) that the practitioner sought to re-characterise the process as having taken place under section 111A. Counsel for Pepper submitted that this was plainly not in accordance with the Act. He suggested that, under the Act, there was an entirely binary process – either one could invoke the s. 106 procedure (where more than one creditor was entitled to vote at the meeting) or one could invoke s. 111A (which only applies where there is a single creditor entitled to vote on a proposal for a PIA).
28. In order to properly understand the submission which is made by counsel for Pepper, it is necessary to consider the underlying facts.
The Relevant Facts
29. For this purpose, I now describe the facts which arise in the case of Mr. Leonard O’Hara. Since these are interlocking applications, it is sufficient to consider his case alone. In his case, the proposed PIA would suggest that Mr. O’Hara has four creditors. The PIA has been prepared on the basis that each of Pepper, Avantcard, Finance Ireland Asset Management (“FIAM”) and A. Browne Limited are creditors of Mr. O’Hara with an entitlement to share in the distribution to be made under the proposed PIA. However, neither Avantcard nor FIAM proved their respective debts pursuant to s. 98 of the 2012 Act. As a consequence, they were clearly not entitled to vote at any creditors’ meeting and, absent an order extending the time for them to prove their debts, they will not be entitled to participate in any distribution, in the event that the PIA comes into effect. No such application for an extension was ever made by either of them.
30. The only creditors who, in fact, submitted appropriate proofs of debt were Pepper and A. Browne Limited. They were, accordingly, the only creditors entitled to vote. Because there were two such creditors, the practitioner could not avail of s. 111A but was required to convene a meeting of creditors under s. 106.
31. Following receipt of the proof of debt, the practitioner sent a notice to both Pepper and A. Browne Limited of a creditors’ meeting to take place at 10:45am on 11th December, 2017, at 1 Garden Vale, Ballymahon Road, Athlone, Co. Westmeath. The notice expressly invoked section 106(1). Insofar as relevant, the notice was in the following terms:-
“I hereby confirm for the purposes of Section 106(1) of the Personal Insolvency Act 2012 …, it is proposed to hold a meeting of the creditors of Leonard O’Hara…for the purpose of considering the proposal for a [PIA], on 11th Dec 17at 10:45hrs…in 1 Garden Vale, Ballymahon Rd, Athlone…”
32. The notice was issued on 27th November, 2017. In the emails circulating the notice, the practitioner indicated that all proxies should be returned to him by 4pm on Friday, 8th December, 2017.
33. Pepper duly completed a proxy form and this was submitted to the practitioner by email on 8th December, 2017. On the same day, the practitioner acknowledged receipt of the proxy. Pepper indicated in the proxy that it was voting against the proposed PIA. Of the overall indebtedness of Mr. O’Hara, Pepper is by far the largest creditor. Of the total debt owed by him of €245,385, Pepper is owed €184,313 in respect of account number M20012762 and €28,328 in respect of account number M20024132. Although neither Avantcard nor FIAM submitted proofs of debt, the PIA records that the amount owed to Avantcard on foot of a credit card account is €15,000, and the amount owed to FIAM in respect of car finance is the sum of €11,994. The amount owed to A. Browne Limited is €5,751.
34. As noted above, A. Browne Limited did not submit a form of proxy and, therefore, did not vote. The effect of the proxy delivered on behalf of Pepper meant that the PIA was not approved. Even if A. Browne Limited had delivered a form of proxy and voted in favour of the proposal, this would not have made any difference in terms of the outcome of the vote. Indeed, even if Avantcard and FIAM had submitted proofs of debt and voted in favour of the proposals, the outcome would have been the same. However, if the practitioner was in a position to persuade the court that either A. Browne Limited or some combination of A. Browne Limited or one or more of the other creditors (had they submitted a proof of debt) represented a different class of creditors to Pepper, it would have been open to the practitioner to contend that the requirements of s. 115A(9)(g) had been complied with. As noted above, it is a condition of the grant of relief under s. 115A(9) that, at least one class of creditors has accepted the proposed arrangement by a majority of over 50% of the value of the debts owed to that class.
35. In circumstances where the only creditor to prove its debt and exercise its voting entitlement was Pepper, the inevitable result was that the proposed PIA was rejected. Section 108(8)(b) set out the consequence that follows from a rejection of a proposed PIA. It provides as follows:-
“Where at the taking of a vote at a creditors’ meeting in accordance with subsection (1) the proposal is not approved…or deemed…to have been approved, subject to s. 115A, the Personal Insolvency Arrangement Procedure shall terminate and the protective certificate issued under section 95 shall cease to have effect.”
36. Having regard to the fact that a meeting of creditors was convened under s. 106 (as the notice convened the meeting made very clear), Pepper confidently expected that, as a consequence of s. 108(8)(b), the protective certificate would cease to have effect. This was for the reason that Pepper foresaw no potential for the application of s. 115A in circumstances where it was the only creditor to vote and where s. 111A had not been invoked by the practitioner (for the very simple reason that there was more than one creditor entitled to vote). Pepper believed that s. 111A could not apply. Pepper was reinforced in this view by the simple fact that the notice had expressly been served for the purpose of convening a meeting under section 106. The notice had not sought to comply in any way with the provisions of s. 111A which, as noted above, requires the practitioner to give written notice to the creditor requiring the creditor to respond within fourteen days from the date of that notice signifying whether or not the creditor approves or rejects the proposals.
37. Thereafter, Pepper was taken by surprise when, on 21st December, 2017, a notice of motion was filed by the practitioner in the Circuit Court office in Tullamore seeking an order pursuant to section 115A(9). In the affidavit subsequently sworn on 22nd December, 2017, in support of the motion, the practitioner made the case that he had complied with the fourteen day time limit prescribed by s. 115A(2) in that his application had been made within the 14 day period after the date of receipt of “ the notice of the creditor concerned under section 111A(6) …”. It should be noted, at this point, that no notice had ever been given by Pepper under s. 111A(6). As described above, Pepper had simply submitted a proxy form to vote at the meeting of creditors convened under s. 106. It did not therefore purport to submit any notice under s. 111A(6).
38. In para. 10 of the notice of motion, the practitioner purported to certify that s. 111A applies to the proposal. When Pepper challenged this position in its notice of objection and in the affidavit of Grainne Naughton sworn on 16th May, 2018, the practitioner responded in paras. 12-14 of his affidavit sworn on 16th July, 2018 as follows:-
“12. I say…Avantgarde (sic) were not entitled to vote due to no receipt of a proof of debt. I say and believe that Finance Ireland Asset Management were not entitled to vote in circumstances where they failed to provide a proof of debt.
13. I say that A. Browne Limited was not entitled to vote in circumstances where they provided no proxy so therefore no vote could be registered.
14. I say in particular…that, therefore, it was correct and appropriate to use Section 111A for the purposes of the within application.”
39. The problem with that averment is that s. 111A had never been invoked by the practitioner at the relevant time. The practitioner never purported to serve a notice under s 111A(2) and Pepper had never given any notice under s 111A(6). Furthermore, contrary to the suggestion made in para. 13 of his affidavit, A. Browne Limited was, in fact, entitled to vote, having submitted a proof of debt.
The case made on behalf of the practitioner
40. At the hearing on 10th December, 2018, counsel for the practitioner acknowledged that, on a literal construction of the 2012 Act, the position taken by Pepper is correct. However, counsel argued that this would lead to an absurdity which cannot have been intended by the Oireachtas. Counsel argued, in particular, that the 2015 Act, which introduced both s. 111A and s. 115A, was enacted to enable an independent review to be undertaken of proposals for a PIA in circumstances where either a sole creditor or a majority creditor vetoes the PIA proposals. It was submitted that, in the present case, there was a single creditor rejection of the proposal and that it would be absurd in those circumstances if the debtor and the practitioner were not entitled to rely upon s. 111A which, counsel argued, was clearly designed to ensure that there could not be a veto of a proposal for a PIA by a single creditor.
41. Counsel for the practitioner relied on s. 5(1) of the Interpretation Act 2005 which provides as follows:-
“(1) In construing a provision of any Act (other than a provision that relates to the imposition of a penal or other sanction)—
(a) that is obscure or ambiguous, or
(b) that on a literal interpretation would be absurd or would fail to reflect the plain intention of—
(i) in the case of an Act to which paragraph (a) of the definition of ‘Act’ in section 2(1) relates, the Oireachtas, or
(ii) in the case of an Act to which paragraph (b) of that definition relates, the parliament concerned,
the provision shall be given a construction that reflects the plain intention of the Oireachtas or parliament concerned, as the case may be, where that intention can be ascertained from the Act as a whole.”
42. The provisions of s. 5 of the 2005 Act were considered by the Supreme Court in Irish Life and Permanent plc v. Dunne [2016] 1 I.R. 92. In that case, Hogan J. had stated a case for the opinion of the Supreme Court in relation to a question of law that arose in the course of the hearing of a Circuit Court appeal which was heard entirely on affidavit. In doing so, Hogan J. was conscious of the provisions of s. 38(3) of the Courts of Justice Act 1936 (“ the 1936 Act ”) which, on their face, permit a case to be stated by the High Court (when hearing a Circuit appeal) only in cases where oral evidence had been given. There was no equivalent provision permitting a case to be stated in respect of appeals from decisions of the Circuit Court where no oral evidence was given. There are two separate provisions within the 1936 Act dealing with appeals from the Circuit Court to the High Court. Section 37 deals with an appeal where no oral evidence is given. It says nothing about the power of the High Court to state a case for the determination of the Supreme Court. In contrast, s. 38(1) deals with appeals from the Circuit Court to the High Court in cases where oral evidence was given. In s. 38(3), there is express provision that:-
“The judge hearing an appeal under this section may, if he so thinks proper on the application of any party to such appeal, refer any question of law arising in such appeal to the Supreme Court by way of case stated…” (Emphasis added)
43. Thus, the ability to state a case under s. 38(3) was limited to appeals “ under this section” . The difficulty in that case was that all of the evidence had been given on affidavit and, therefore, an issue arose as to whether it could be said that the High Court had any jurisdiction to state a case to the Supreme Court.
44. In his judgment in the Supreme Court in Irish Life and Permanent v. Dunne, Clarke J. (as he then was) drew attention to the provisions of s. 5(1) of the 2005 Act. He also cited what he had previously said in Kadri v. Governor of Wheatfield Prison [2012] 2 ILRM 392 at p. 402 – 403:-
“…It is important to note that the construction which [s. 5(1) of the 2005 Act] … requires is one that ‘reflects the plain intention of (the legislature) where that intention can be ascertained from the Act as a whole’. It is clear, therefore, that it not only is necessary that it be obvious that there was a mistake in the sense that a literal reading of the legislation would give rise to an absurdity or would be contrary to the obvious intention of the legislation in question, but also that the true legislative intention can be ascertained. There may well be cases where it may be obvious enough that the legislature has made a mistake but it may not be at all so easy to ascertain what the legislature might have done in the event that the mistake had not occurred.”
45. In the Irish Life case, Clarke J. noted that, in Kadri, he had expressed the view that a literal construction of the provision under consideration there was not absurd and furthermore, he had come to the view that the potential problem with the relevant legislation in that case was that the Oireachtas (had it applied its mind to the question), might have considered including some additional provisions in the legislation concerned. However, Clarke J. concluded that there was a range of potential provisions which could have been included by the Oireachtas in the legislation in question. In contrast, in the Irish Life case itself, Clarke J. was able to come to the conclusion that there was no conceivable basis on which the Oireachtas might have chosen to allow for a case stated in one type of Circuit appeal but not in another. He, therefore, concluded that a literal interpretation of the 1936 Act would lead to an absurdity. However, he pointed out that this was not sufficient for the purposes of section 5. At p. 108, he added:-
“As pointed out in Kadri, it must also be possible to tell, from the Act as a whole, what the true legislative intention actually is. In my view, such is possible in this case. The 1936 Act was designed to make a change from the previously existing position which allowed for a form of appeal to this Court under s.61 of the 1924 Act in circumstances where either, in accordance with the legislation in place at the time, the two judges of the High Court hearing the appeal from the Circuit Court disagreed or where, even though they agreed, they were satisfied that the case involved a question of such importance as to be fit to be the subject of an appeal to this Court. That regime clearly contemplated that there would be cases where it would be appropriate that final clarification be obtained on important questions from this Court. There is nothing in the 1936 Act which suggests that there was a radical change in policy. Rather, there was a change in the location of the hearing of certain types of appeals … due to a mistake in drafting, led, on a literal construction, to an exclusion, for no good reason, of the right to have important issues finally clarified by this Court, but only in cases where no oral evidence was heard in the Circuit Court. In my view, the intention of the Oireachtas is clear. It was that a High Court judge hearing a circuit appeal should have the entitlement, if satisfied that it was an appropriate case in which to exercise the power, to state a case to this Court. The statute was not intended to exclude, for no obvious or conceivable reason, the case stated procedure from being available in respect of cases originally heard in the Circuit Court without oral evidence.”
46. In the course of his judgment, Clarke J. sounded a note of warning that the courts cannot too readily conclude that a literal construction leads to absurdity. He stressed that the question must be asked in each case as to whether there is a possible basis on which the Oireachtas might have chosen to legislate in the manner which a literal construction of the relevant statutory provision would suggest. At p. 108, he said:-
“As pointed out in Kadri, it is not for this Court to assess the policy behind any legislation. Where there are possible reasons for adopting a particular measure, even if there might be grounds for believing that the legislation may be ill-suited to achieving its ends, the courts are given no mandate by s.5 of the 2005 Act to intervene. The question which must be asked is as to whether there could be any possible or conceivable basis on which the Oireachtas might have chosen to legislate in the manner which a literal construction of the relevant provisions would require.”
47. Section 5 of the 2005 Act has been applied in relation to a different aspect of section 115A of the 2012 Act. In Michael Hickey [2018] IEHC 313, Baker J. had to consider the provisions of section 115A(5). Under that provision, where an application is made for an order under s. 115A before the expiry of the period of the protective certificate, the certificate will continue in force until either the PIA comes into effect or the application is refused and any appeal has either been withdrawn or determined. There is no express provision in the 2012 Act (as amended) dealing with circumstances where an application is made under s. 115A within fourteen days after the date of a meeting of creditors and where, in the meantime, the protection period has expired. In this context, it should be noted that under s. 115A(2) there is a period of fourteen days after the date of the meeting of creditors in which to make an application for an order under section 115A(9). However, in some cases, it may not have been possible for the application to have been made within the period of the protective certificate.
48. In such cases, an issue arose as to whether the debtor would continue to have protection under the 2012 Act where the relevant practitioner acting on behalf of the debtor had brought an application under s. 115A within the applicable fourteen day period prescribed by section 115A(2). There was no express provision in the 2012 Act which conferred any such protection on the debtor. In her judgment, Baker J. referred to the twofold test applied by the Supreme Court in the Irish Life case, namely:-
“(a) Whether an interpretation in accordance with the literal or plain meaning of the words did lead to a conclusion that there was no ‘possible or conceivable basis on which the Oireachtas might have chosen to legislate in the manner which a literal construction of the relevant provisions was required’;
(b) If such an absurd result flows from a literal interpretation, the court may engage the approach envisaged by s. 5(1)(b) only if it is possible to tell from the Act as a whole ‘what the true legislative intention actually is’.”
49. Baker J. concluded that a plain reading of s. 115A(5) led to an absurd result in circumstances where there was no possible or rational basis for the distinction between one cohort of applicants under s. 115A who, because of the timing of the meetings of creditors, were in a position to lodge an application under s. 115A within the original protection period of 70 days or (if applicable) an extended period of 110 days, and the other cohort who “ for reasons which might arise because of the complexity of the case, or indeed, the approach that the creditor or creditors might have taken in the earlier stages of the process, would find that it was not possible for the application to be made within the currency of the protective certificate”.
50. Baker J. then had to consider whether the second limb of the Irish Life test had been met – i.e. whether the legislative intention could be discerned from the Act as a whole. In considering this issue, Baker J. addressed the purpose of the Act. Baker J. reiterated what she had previously said in Re Nugent [2016] IEHC 127 at para. 59 where she described the purpose as follows:-
“The purpose…is to avoid a debtor being made bankrupt… [T]he personal insolvency regime offers a more benevolent means by which he or she can deal with indebtedness. This is envisaged by the Oireachtas as being in the common good.”
51. Baker J. also reiterated what she said in JD [2017] IEHC 119 at para. 72:-
“The purpose of the … legislation is to enable the resolution of personal debt, and the common good sought to be achieved in s. 115A is the protection of the right to continue to enjoy residence in a person’s home.”
52. At para. 61 of her judgment in Michael Hickey, Baker J. indicated that the intention of the Oireachtas was that the benefit of statutory protection from creditors should continue to apply pending the determination of an application under section 115A. In reaching that view, she had regard to the long title to the Act and its recitals.
53. The approach taken by Baker J. in relation to the application of s. 5 of the 2005 Act, was subsequently upheld by the Court of Appeal in Re Michael Hickey [2018] IECA 397 (albeit that the Court took a different view as to the result)..
54. In his judgment in the Court of Appeal, Peart J. said at para. 40:-
“In circumstances where it is not expressly provided in the Act that a debtor who lodges a s. 115A application outside the 70 day life of the protective certificate, yet within 14 days of the creditors’ meeting, continues to enjoy the protection of the protection certificate, the trial judge was correct to avail of s. 5 of the Interpretation Act, 2005 in order to give a construction which, having regard to the Act as a whole, gives effect to the clear intention of the Oireachtas. In my view, she was entitled to conclude that the intention of the Oireachtas was that all debtors who lodged a s.115A application within 14 days of the creditors’ meeting would continue to be protected between the expiry of the 70 day life of the certificate and the lodging of that s. 115A application provided same was lodged within the 14 days period provided for in s. 115A(2) of the Act. The section must be so construed if it is not to give rise to a consequence that could never have been intended by the Oireachtas. To construe the section thus is not to indulge in an impermissible exercise of re-writing the provision, but is rather to construe it in a way that is consistent with the legislative purpose of the Act when it is read as a whole. I would uphold the conclusions of the trial judge at para. 62, where she stated:
‘62. I consider that the Oireachtas did intend the benefit of a statutory protection from creditors to enure to the benefit of a debtor pending the determination of an application under s. 115A. Further, the time limit for the lodging of such application (being 14 days from the creditors’ meeting) does not leave the continued protection at large, but in my view , and provided an application is lodged within the statutory 14 days period , the Oireachtas did intend, in the light of its intention in the Act stated in broad and positive terms in the recitals and preamble, that a debtor would continue to have the benefit of a protective certificate until the conclusion of the s. 115A process.’”
55. Counsel for the practitioner argued that the same approach should be taken here. He argued that a literal interpretation gives rise to absurdity or involves a failure to reflect the intention of the Oireachtas gleaned from a consideration of the Act as a whole. In making that argument, counsel drew attention to the following features of the Act which, he suggested, indicate a clear intention on the part of the Oireachtas to ensure that, in cases where a proposed PIA is shot down by a single creditor, there should be an ability to apply to the court under s 115A:
(a) In the first place, when, in 2015, the Oireachtas came to enact what is now s 115A of the 2012 Act (and to make it a condition of relief under that section that at least one class of creditor should have accepted the proposed PIA) the Oireachtas was careful to dis-apply that condition in a case to which s. 111A applies – i.e. where the proposed PIA has been rejected by the only creditor entitled to vote. It was submitted that this showed a clear legislative intention to ensure that the ability to apply to the court under s 115A should not be defeated where there is only one creditor with an entitlement to vote and that creditor refuses to approve the proposal;
(b) Secondly, it was submitted that it made no sense that a debtor with a single creditor entitled to vote should have the ability to avail of s. 115A while a debtor in the position of Mr or Mrs O’Hara should not have that ability. It was argued that no logical distinction can be made between rejection by a single creditor entitled to vote (where there is the ability to avail of s. 115A) and rejection by a single voting creditor (where, on a literal interpretation of the Act, there is no ability to avail of s. 115A).
(c) It was also contended that s. 111A itself also showed a clear legislative intention to ensure that the system set up by the 2012 Act would continue to be capable of functioning even in cases where there is only one creditor who participates in the process. The argument was that the failure to legislate for a similar outcome in a case such as the present one is an obvious lacuna in the 2012 Act as amended in 2015. It was suggested that the legislature could never have intended that such a lacuna should occur;
(d) Counsel also drew attention to the provisions of s. 108(8) which was inserted in the 2012 Act at the same time as s. 111A and s 115A. Under s. 108(8)(a), where no creditor votes at a creditors’ meeting, the proposed PIA will be deemed to have been approved. Counsel submitted that this again illustrated a concern on the part of the Oireachtas that the process established under the 2012 Act should not be defeated by the failure of creditors to vote. In the context of a single creditor entitled to vote, s. 111A(7)(b) was to similar effect. It was submitted that, similarly, the Oireachtas could not have intended that a s. 115A application here should be defeated as a consequence of the failure of A. Browne Limited to vote. It was argued that the amendments made in 2015, introducing s. 111A and s. 108(8), were informed by experience in the intervening years since the enactment of the 2012 Act, that dividends to unsecured creditors were often so small that it was not worthwhile for smaller creditors to submit proofs of debt. These amendments made in 2015 were therefore clearly designed to overcome this problem. The case made was that the Oireachtas could not have intended that the failure of A. Browne Limited to vote would put s 115A beyond the reach of Mr and Mrs O’Hara.
The response of Pepper to the s. 5 argument
56. In his response, counsel for Pepper drew attention to the opening words of s. 111A(1) where, he suggested, the Oireachtas, very clearly, drew a line between the circumstances where ss. 106-111 will apply and the quite separate situation in which s. 111A will apply. In particular, he drew attention to the following language in s. 111A(1):-
“(1) Where-
(a) a…. practitioner has prepared a proposal for a [PIA]…
(b) only one creditor would be entitled to vote at a creditors’ meeting…
the procedures specified in this section, and not those specified in sections 106 and 108 to 111, shall apply …” (emphasis added)
57. Counsel submitted that this language demonstrates that the Oireachtas, quite deliberately, provided for a binary regime, with one set of statutory provisions governing those situations where there is more than one creditor entitled to vote and an entirely separate provision dealing with cases where there is only one such creditor. Counsel submitted that the practitioner was, in substance, asking the court to re-write the 2012-2015 Acts which he said was impermissible.
58. Counsel also stressed that, in requiring that at least one class of creditor should vote in favour of a proposal for a PIA, the Oireachtas clearly intended to put a checking mechanism in place, so that the court, when dealing with an application under s. 115A, would have the assurance that there was at least one cohort of creditors who regarded the proposals as commercially acceptable. This is a well tried mechanism which is used, for example, in the legislation governing examinerships originally introduced under the Companies (Amendment) Act 1990 (“ the 1990 Act ”).
59. I agree that such a requirement, in a multi-creditor case, is an important checking mechanism. As counsel for Pepper suggested, this is reflected in the approach taken in the context of examinerships (which have an obvious parallel with proceedings under the 2012-2015 Acts). If the proposed arrangement has been approved by at least one class of creditor, it provides a measure of re-assurance to the court that the proposals make business sense and are capable of being considered to be reasonable in all the circumstances.
60. Counsel for Pepper also submitted that the practitioner was proceeding on the basis that, in some way, a debtor has a right to pursue a PIA. Counsel suggested that this was fundamentally misconceived. He argued that the ability to pursue a PIA is a statutory privilege and a debtor must therefore meet the strict statutory conditions for the exercise of that privilege. It was also argued that it was wrong to suggest (as the practitioner did) that the operation of s. 111A, in accordance with its terms, leads to any unfairness. Section 111A is simply an aspect of the statutory scheme prescribed by the Oireachtas, another feature of which is the requirement under s. 115A(18) that the relevant mortgage loan be in arrears as of 1 January, 2015 (or to have been in arrears before that date and to have been the subject of an alternative repayment arrangement). Counsel cited, in this context, the unfortunate position of the debtor in Sarah Hill [2017] IEHC 18 who, because she had managed to keep up payments on a mortgage loan as of January 2015, was unable to avail of s. 115A (a result which Baker J characterised as harsh).
61. Counsel for Pepper also distinguished the present case from Michael Hickey on the basis that, in the latter, there was an obvious mistake and, furthermore, it was possible to discern the true intention of the Oireachtas. In such circumstances, both limbs of the s. 5 test were readily satisfied.
Discussion
62. I have considered the submissions made on both sides. I can understand the desire of the practitioner to treat the matter as falling within s. 111A. It is regrettable that A. Browne Limited, having gone to the trouble of submitting a proof of debt, did not, thereafter, exercise its entitlement to vote. I can see that there is an argument to make that a lacuna exists in the Act in so far as the Act does not deal with circumstances where there is more than one creditor entitled to vote but where only one creditor exercises that entitlement. However, the existence of a perceived lacuna does not necessarily give rise to an absurdity or to the conclusion that the Oireachtas cannot have intended that such a purported lacuna should exist.
63. Under the 2012-2015 Acts, the Oireachtas has put in place a detailed statutory scheme to enable debtors, subject to fulfilling a significant number of conditions, to resolve their indebtedness and be restored to some semblance of normality so that they can, again, play an active role in the economic activity of the State. In putting that scheme in place, the Oireachtas has attempted to balance the interests of the common good in resolving such indebtedness against the rights of creditors. The Acts restrict the rights of creditors in quite far-reaching ways. It is unsurprising, therefore, that the Oireachtas would strictly delimit the ambit of the scheme which has been put in place. The Oireachtas has chosen to do so in a number of ways. The provisions of s.115A are a paradigm example of this. Section 115A contains a myriad of conditions which must be satisfied before the court can sanction a proposed arrangement.
64. Thus, for example, s.115A(18) requires that there must be a debt secured on the debtor’s principal residence that was in arrears as of 1 January, 2015 (or in arrears before that date and subject to an alternative payment arrangement). As Baker J observed, that requirement had quite a harsh impact on the debtor in Sarah Hill. The result of the application of s115A(18) in that case was that a debtor (who had made valiant efforts to keep up to date with mortgage payments in late 2014) was treated less favourably than a debtor who had failed to make any payment at all during the same period. This was as a consequence of the choice made by the Oireachtas in the way it constructed the statutory scheme under the 2012-2015 Acts. From the perspective of Ms Hill, it must have appeared very unfair – even cruel – that the scheme is designed in this way but the fact is that this is an inherent part of the scheme which the Oireachtas has put in place. In terms of fairness, it is difficult to see how any distinction can be made between s.115A(18) on the one hand and the equally clearly drafted provisions of s.111A(1) on the other. They are both inherent features of the statutory scheme dealing with insolvent debtors. Depending on the circumstances, they both have the capacity to give rise to unwelcome and, sometimes, very unfortunate consequences for debtors. In particular, they may operate to exclude a debtor from the benefits available under statutory scheme created by the 2012-2015 Acts.
65. It is also crucially important to bear in mind that, as noted above, the Acts represent an attempt by the Oireachtas to balance the common good in promoting the resolution of debt on the one hand against the property rights of creditors on the other. Save where a mistake or absurdity is manifest (such as that identified in Michael Hickey), the court should proceed with caution. Any attempt by the court to identify gaps in the legislative regime and to repair such perceived gaps carries a very real risk that the court will interfere with the balance struck by the Oireachtas between the interests of the common good and the rights of creditors. In addition, it carries the risk that a court will trespass on the legislative function of the Oireachtas more generally.
66. Section 5 of the 2005 Act is not intended to give the courts an unfettered power to supplement the provisions of legislation. As Clarke J observed in Kadri, at p 4, the mandate given to the courts by s. 5 is to engage in interpretation not rewriting. In Kadri, Clarke J suggested that the approach to be taken under s. 5 is broadly similar to that taken in the context of contract law known as the “ correction of mistakes by construction ”. In such cases, the court will intervene only where (a) there is a clear mistake and (b) it is clear what the correction ought to be. That is a useful shorthand for the approach which the court should take under s. 5 as explained by the Supreme Court both in Kadri and in Irish Life.
67. As explained by the Supreme Court in Irish Life, the test to be applied under s. 5 involves two stages:
(a) in the first place, in addressing the question whether there is an obvious mistake or absurdity, the court must consider whether there is any possible reason why the legislature may have decided to adopt the relevant statutory provision in the terms in question. If there is, that is the end of the court’s enquiry. The court should only move to the second stage where no possible reason can be identified; and
(b) In those cases where it is not possible to identify any possible reason for the course taken by the Oireachtas in the literal language of the provision, the court may only intervene where it is clear from a consideration of the Act as a whole, what the true legislative intention is. In cases where there is more than one way of addressing the mistake or absurdity in issue, the court has no mandate to interfere.
68. Kadri is a very good illustration of the limits of the court’s power under s. 5. In that case, the Supreme Court was clearly troubled that there was a lacuna in the Illegal Immigrants Act 1999. The court was troubled by the fact that the Act made no provision to extend the maximum 8 week period of detention of an illegal immigrant facing deportation where the immigrant in question effectively frustrated the ability of the authorities to deport him within that period by strenuously resisting all attempts to place him on a flight or other means of transport. While Clarke J suggested that it may well have been likely that the Oireachtas might have wished to make some provision for that situation, the Supreme Court was not satisfied that s. 5 could successfully be invoked to fill the perceived gap in the legislation. The court was not persuaded that there was an obvious mistake and, even if there were a mistake, it was not possible to say what the legislature might have done in the event that it had been alive to the purported mistake. As para. 3.9 of the judgment of Clarke J illustrates, there was more than one way in which the problem might have been addressed if the Oireachtas had turned its mind to it.
69. In the present case, I do not believe that the case made by the practitioner passes the first stage of the twofold s. 5 test. I am far from convinced that there is an obvious error on the part of the Oireachtas in enacting what is now s. 111A of the 2012 Act. It seems to me that it is possible to identify a plausible reason why the Oireachtas enacted s. 111A in the way that it has. In this context, there is a logical distinction to be made between single creditor cases and cases where there is more than one creditor entitled to vote but where only one creditor ultimately decides to vote. It is clear from s. 111A that the Oireachtas did not wish to deny debtors the protection of s. 115A in single creditor cases. In such cases, there will be no meeting of creditors and, therefore, the checking mechanism that such a meeting provides will be absent. The Oireachtas clearly did not wish to see the operation of the Act effectively vetoed by a single creditor in such circumstances.
70. That is quite different to the multi creditor case where only one creditor turns up at the meeting (either in person or by proxy) to vote. In such cases, the Oireachtas may well have had in mind that the meeting still provides a useful checking mechanism in that the failure of the remaining creditor or creditors to vote demonstrates that the terms of the proposed PIA were so unattractive that they could not command the support of any of the creditors entitled to vote.
71. The practitioner seeks to answer that contention by suggesting that other provisions of the Acts indicate that the Oireachtas did not have in mind that non-attendance by a creditor at a meeting should be equated with rejection of the proposals for a PIA. In particular, counsel for the practitioner pointed to the provisions of s. 108(8) of the 2012 Act (as inserted by s. 15(b) of the 2015 Act) under which proposals for a PIA in a multi-creditor case will be deemed to be approved where no creditor votes at the meeting. It was submitted that this showed that the Oireachtas did not intend that a non-voting creditor should be taken to be an objecting creditor.
72. I accept that such an explanation is open on the basis of this provision. However, I do not believe that this is the only possible explanation which is open. As noted in paras. 69-70 above, there seems to me to be a logical basis for the Oireachtas to distinguish between cases where no creditor votes at a meeting and cases where not all creditors refrain from voting. In cases where no creditor votes on proposals, the Oireachtas may simply have been concerned to ensure that the Acts could continue to operate notwithstanding creditor apathy. In such cases, it was therefore necessary to put in place a provision such as s. 108(8).
73. The difficulty is that it is by no means certain that the Oireachtas must have intended that the same approach should be taken in cases where not all creditors refrain from voting. This is readily apparent when one considers those cases where more than one creditor votes. If, in such cases, the non-voting creditor was to be treated as voting in favour of the proposals, this could have the effect of seriously skewing the outcome of the vote and devaluing the votes of those creditors who had taken the trouble to cast a vote. It would reward apathy and undermine the incentive to creditors to cast their vote. It would also undermine the value of the checking mechanism which the holding of a meeting provides.
74. It might be suggested that this consideration has less weight in cases, such as the present, where only one creditor has chosen to exercise its entitlement to vote. However, I do not believe that one could safely conclude that the consideration carries no weight at all. Even in such cases, weight might be attached to the fact that the creditor in question has taken the trouble to turn up at the meeting (either in person or by proxy) and exercised its entitlement to vote. In that way, the holding of the meeting has still served some purpose as a checking mechanism. In my view, it is simply unsafe to rule this out as a basis for the manner in which the Oireachtas chose to proceed in enacting the relevant provisions of the 2012 Act (as amended).
75. In these circumstances, I have come to the conclusion that the first part of the s. 5 test has not been surmounted by the practitioner in this case. I do not believe that it can be safely said that the Oireachtas has made a mistake in not making express provision to deal with circumstances where it transpires that, at a meeting convened under s. 106, only one creditor exercises its entitlement to vote.
76. Furthermore, even if it could be said that there is an obvious mistake on the part of the Oireachtas, I cannot see any basis on which it could be said that the second limb of the s. 5 test has been satisfied. I do not believe that it is, at all, clear that the Oireachtas would have made provision that a practitioner would be entitled to retrospectively invoke s.111A where it transpires that he has previously convened a meeting under s. 106 and where only one creditor exercises its entitlement to vote. That is essentially what the practitioner contends here.
77. There is more than one way that the Oireachtas could have addressed the purported mistake. The approach advocated by the practitioner is, certainly, one avenue that might have been adopted (by means of appropriate additional provisions in s.111A). But the Oireachtas could also have decided, for example, to expressly provide that the non-voting creditors should, consistent with s. 108(8), be counted as voting in favour of the proposed PIA. The Oireachtas might further have provided, in such cases, that, where the deemed votes in favour are outvoted by voting creditors holding debts of a greater amount, the practitioner would have to establish that the non-voting creditors constitute a separate class within the meaning of s. 115A(17). There would, obviously, be valid policy reasons why the Oireachtas might decide that the practitioner should have to show that the non-voting creditors constitute a separate class within the meaning of s. 115A(17). As discussed above, the requirement in s. 115A(9)(g), that there should be at least one class of creditors voting in favour of the proposals, provides an important checking mechanism.
78. The suggestion made in para. 77 above is no more than an indication of a possible approach that might conceivably be taken. There are other approaches that would also be open. Crucially, one could not rule out that the Oireachtas might not wish to legislate for some additional requirement or safeguard in cases where, as here, there is a creditor entitled to vote who does not exercise that entitlement. It is not a given that the Oireachtas would proceed in the manner suggested by the practitioner.
79. It follows, in my view, that the second stage of the s. 5 test cannot be satisfied in this case.
Conclusion
80. In the circumstances, I have come to the conclusion that there is no scope for the application of s. 5 of the 2005 Act. I must accordingly decide this case by reference to the literal meaning of the provisions of the 2012-2015 Acts. In light of the provisions of s. 111A(1) of the 2012 Act (as amended) there is no basis on which the practitioner can rely on s. 111A in this case. It follows that there is no basis on which the provisions of s. 115A can be invoked.
81. I must therefore dismiss the appeal and affirm the order of the Circuit Court dismissing the application made by the practitioner under s. 115A.
The matter of the Personal Insolvency Acts 2012-2015 And in the matter of
Re Rebecca Forde Egan (a Debtor)
[2019] IEHC 889 (20 December 2019)
JUDGMENT of Mr. Justice Denis McDonald delivered on 20th December, 20191. This is an appeal by Bank of Ireland Mortgage Bank (“the bank”) from an order of HerHonour Judge Mary Enright in the Circuit Court made on 20th December, 2018 in whichshe rejected the objection of the bank to an application under s. 115A (9) of the PersonalInsolvency Act, 2012 (“the 2012 Act”) as amended by the Personal Insolvency(Amendment) Act, 2015 (“the 2015 Act”). Although not recorded in the copy order of thelearned Circuit Court judge provided to me, it appears to be the case that an order wasalso made pursuant to s. 115A (9) confirming the coming into effect of a personalinsolvency arrangement proposed on behalf of the above-named debtor, Ms. RebeccaForde Egan, by Mr. Darragh Duffy, her personal insolvency practitioner (“thepractitioner”). The main features of the proposed arrangement are outlined in para. 4below. As this is a Circuit Appeal, the application of the practitioner under s. 115A (9) wasfully reheard by this court together with the objection filed on behalf of the bank.Relevant facts2. Ms. Forde Egan is a public servant employed by the Health Service Executive (“HSE”).She and her husband, Mr. Larry Egan, have three children aged 14, 18 and 20respectively. Mr. Egan was adjudicated a bankrupt in 2009. He was subsequentlydischarged from bankruptcy in 2014. The family lives in County Laois and there is nodispute between the parties that the family home constitutes the principal privateresidence of Ms. Forde Egan for the purposes of s. 115A of the 2012 Act. It was agreed,in the course of the proceedings before the Circuit Court, that the market value of thefamily home is €410,000.3. Ms. Forde Egan is indebted as follows:-(a) There is a sum of €624,457 due to the bank in respect of a loan account securedover the family home. Subject to Mr. Egan’s bankruptcy, both he and Ms. FordeEgan are jointly and severally liable to the bank in respect of this loan. Theimplications which flow from the bankruptcy are considered in more detail below.(b) Ms. Forde Egan has a credit card debt of €2,072 which is owed to Allied Irish BanksPlc;(c) Ms. Forde Egan is indebted to the Bank of Ireland on a current account in the sumof €1,313;(d) There is a sum of €11,960 owed to Close Brothers Motor Finance on a hire purchaseagreement in respect of a motor vehicle.Page 2 ⇓4. The most significant features of the proposed arrangement are as follows:-(a) It is proposed that the arrangement will be put in place for a period of six yearswhich is the maximum period permitted under the 2012-2015 Acts;(b) The outstanding balance on the mortgage loan secured on the family home will bewritten down from €624,457.00 to €451,000.00 with the residual balance of€173,457.00 being treated as unsecured debt in respect of which a dividend in thetotal sum of €40,651.00 will be paid to the bank over the course of the proposedarrangement;(c) The mortgage loan account will be restructured. The remaining term of the loanwill be extended to 23 years. The interest rate is to remain at the existing trackerrate based on the ECB rate plus a margin of 0.50% resulting in a monthly mortgagepayment of €1,780.00 (of which €961.00 per month will be paid by Ms. Forde Eganand the balance by Mr. Egan);(d) A dividend of 23 cent in the euro will be paid to all of the unsecured creditors. Thebank will share in this dividend as set out at (b) above.5. At the meeting of creditors, the bank (together with Bank of Ireland) voted against theproposed arrangement while Allied Irish Banks Plc and Close Brothers Finance Ltd votedin favour. In percentage terms, 97.66% in value of creditors voted against the proposedarrangement while 2.35% in value voted in favour. Thereafter the practitioner broughtan application pursuant to s. 115A (9) to the Circuit Court. Under s. 115A (9) the court isempowered (subject to satisfaction of a wide range of conditions) to confirm the cominginto effect of a proposed arrangement notwithstanding that it has not been supported bya majority of creditors. It is unnecessary, at this point, to set out all of the conditionsthat must be satisfied in s. 115A. It is sufficient to note that they include the followingconditions:-(a) One of the debts of the debtor must be secured over his or her principal privateresidence;(b) The debt secured over that residence must have been in arrears as of 1st January,2015 (or at minimum the debtor must have entered into an alternative repaymentarrangement with the secured creditor in advance of 1st January, 2015);(c) The arrangement must have been supported by at least one class of creditor.6. A notice of objection was filed on behalf of the bank in the course of the Circuit Courtproceedings. In that notice, the bank objected to the proposed arrangement on a numberof grounds namely:-(a) It was contended that the arrangement will not enable the bank to recover the debtdue to it to the extent that the means of Ms. Forde Egan reasonably permit (asrequired by s. 115A (9) (b) (ii) of the 2012 Act);Page 3 ⇓(b) The case was made that the proposed arrangement is unfair and inequitablecontrary to the requirements of s. 115A (9) (e);(c) It was also alleged that the bank is unfairly prejudiced by the proposedarrangement (relying on s. 115A (9) (f) and s. 120 (a) of the 2012 Act);(d) It was submitted that no valid class of creditors has accepted the proposedarrangement;(e) Invoking s. 115A (10) (a) (i) of the 2012 Act, the bank also submitted that theconduct of Ms. Forde Egan in the two-year period prior to the issue of the protectivecertificate does not support the grant of relief;(f) Relying on s. 115A (10) (b), the bank submitted that an alternative proposal whichit made to the practitioner was affordable by Ms. Forde Egan and would haveallowed her creditors to recover the debts due to them to the extent that hermeans would reasonably permit.7. Although not specifically identified in the notice of objection, the principal argument madeon behalf of the bank in the course of the appeal was that, if the court were to approvethe arrangement by granting the order sought by the practitioner under s. 115A (9), thiswould have the effect of depriving the bank of its rights against Mr. Egan, the formerbankrupt, under the provisions of s. 116 (6) of the 2012 Act. It was alleged that such anoutcome is so self-evidently unfair and prejudicial to the rights and interests of the bankthat the court is precluded by s. 115A (9) (e) and (f) from approving such anarrangement. As this was the principal argument raised by the bank on appeal, I willaddress this issue first. To the extent that it is still necessary to do so, I will, thereafter,consider the remaining issues which arise for consideration.Would confirmation of the proposed arrangement deprive the bank of its rightsagainst Mr. Egan under s. 116 (6)?8. Section 116 of the 2012 Act deals with the effect of an arrangement. Under s. 116 (3),while a personal insolvency arrangement is in effect, a creditor who is bound by it isprevented from taking a variety of steps in relation to a specified debt. These include theinitiation of legal proceedings, the prosecution of legal proceedings already in being, orthe taking of any step to secure or recover payment. Furthermore, under s. 116 (4) acreditor is prevented from applying for the issue of a bankruptcy summons under s. 8 ofthe Bankruptcy Act, 1988 (“the 1988 Act”). The same subsection prevents a creditorfrom presenting a petition to have the debtor adjudicated a bankrupt in respect of a debtcovered by the arrangement.9. However, there is an express saver for the rights of creditors in s. 116 (6) insofar aspersons jointly liable with the debtor are concerned. Section 116 (6) expressly permits acreditor to take action against a person who is jointly liable with the debtor. Section 116(6) is in the following terms:-Page 4 ⇓“(6) Nothing in subsections (3) and (4) shall operate to prevent a creditor taking theactions referred to in that subsection as respects a person who has jointlycontracted with the debtor or is jointly liable with the debtor to the creditor andthat other person may sue or be sued in respect of the contract without joining thedebtor.”10. The provisions of s. 116 (6) have been considered in a number of cases. The leadingdecision is that of Baker J. in J.D. [2017] IEHC 119. In that case, the debtor was jointlyand severally liable together with her former husband to a secured creditor, EBS. Therewas a breakdown of the marital relationship which resulted in the couple separating.Thereafter the husband failed to make any contribution towards the mortgagerepayments. An arrangement was proposed on behalf of the debtor by a personalinsolvency practitioner. An application was subsequently made by the practitionerconcerned for an order under s. 115A (9). That application was opposed by EBS on thebasis that the arrangement was proposed on behalf of one joint and several debtor onlyand it was alleged by EBS that it would be manifestly prejudicial and unfair to it toconfirm such an arrangement in light (inter alia) of the implications for EBS in respect ofits rights against the co-debtor husband.11. In her judgment in that case, Baker J. very carefully and comprehensively analysed therelevant provisions of the 2012-2015 Acts in the context of joint and several debtors. Inpara. 39 of her judgment, she drew attention to the fact that there is nothing in the2012-2015 Acts which requires that joint debtors may only seek relief under the Acts bymeans of interlocking arrangements. At para. 40, she continued in the following terms:-“40. I consider that s. 115A(9)(iii) expressly envisages circumstances where a debtordoes not have ownership of the entire interest in his or her principal privateresidence, and may not be the owner of all of the interest in the property whethersubject to a mortgage or otherwise. The subsection is broadly stated as engagingthe question of whether the debtor may avoid disposing of an interest and mayavoid having to dispose of all or a part of his or her dwelling.”12. At para. 41 of her judgment Baker J. made clear that joint debts are included within thescheme of the Acts and that a debtor is not precluded from seeking relief under s. 115Aby reason of the fact that he or she does not own the entire interest in the principalprivate residence and is not the sole mortgagor.13. In J.D., EBS argued that, properly construed, s. 116 (6) applies solely to joint debts anddoes not apply to joint and several debts. This argument was rejected by Baker J. BakerJ. referred to the approach taken by Laffoy J. in ACC Bank v. Malocco [2003] 3 I.R. 191where, in the context of s. 17 (1) of the Civil Liability Act, 1961, Laffoy took the view thatit was “immaterial whether the debtors are jointly liable or jointly and severally liable forthe debt”. At para. 55 of her judgment Baker J. confirmed that she believed it was alsoimmaterial in the context of the 2012-2015 Acts whether the debts of the debtor and herformer spouse were joint or joint and several.Page 5 ⇓14. With regard to the argument made by EBS that it would be unfairly prejudiced by theproposed arrangement, Baker J. drew attention to the standard terms of the arrangementproposed in that case which expressly provided that any person who borrowed money asa joint borrower with the debtor would continue to be liable to the relevant creditornotwithstanding the approval of the arrangement. She also drew attention to theprovisions of s. 17 (1) of the Civil Liability Act, 1961 which provides that the release of orsettlement with one concurrent wrongdoer will only discharge the other concurrentwrongdoers where such release or settlement indicates an intention that the others are tobe discharged. In light of the provisions of Clause 10.4 of the standard terms of thearrangement proposed in that case, it was clear that s. 17 (1) of the 1961 Act did notrelease the debtor’s husband from his liabilities under the mortgage. At para. 55-58 ofher judgment, Baker J. disposed of the unfair prejudice argument as follows:-“55. The protection for the creditor, … is contained within the PIA itself and the expressterms thereof, by which it can be readily ascertained that no inference can bedrawn, or is intended to be expressed, that the creditor intends by virtue of theagreement with the debtor to discharge any co-debtor. For that reason, and havingregard to the approach taken by Laffoy J. in A.C.C. Bank Plc v. Malocco, I considerthat it is immaterial whether the debts of the debtor and her former spouse arejoint, or joint and several, and the contractual protection expressed in the proposedPIA, and the statutory protection from s. 17 of the Civil Liability Act 1961 combineto afford protection to the creditor with regard to its claim against [the debtor’shusband], who is not a party to the restructured arrangement.56. Similar considerations will arise with regard to the security interests that the Bankenjoys in respect of [the debtor’s husband] who is a co-mortgagor.57. I return later in this judgment to the practical effect of the PIA, but on the figurescurrently available, the principal private residence of the debtor has a value wellbelow the amount owed on the mortgage, and insofar as EBS might seek to recoverpossession against [the husband] it will undoubtedly be met by an argument thatan order for possession has no practical import as Ms. D and her children willcontinue to reside in the house and may, as a matter of law, continue to do soprovided the terms of the restructured mortgage are met.58. Therefore, it seems to me that the argument of EBS that it is unfairly prejudicedwith regard to the enforcement of its security interest in the premises insofar as[the husband] is concerned is not borne out by the law or the facts. The prejudiceto EBS will be caused, not by the fact that [the husband] has not been brought intothe restructured arrangement, but by the extent of the negative equity, and not byvirtue of any unfairness arising from [his] non-involvement with the process ….Therefore, any consideration of the argument of unfairness arising from the revisedmortgage falls to be considered on its merits, and whether it unfairly prejudicesEBS in itself, and not by reason of the argument regarding the co-mortgagor.”Page 6 ⇓15. It is clear from this extract from the judgment of Baker J. in J.D. that she took the viewthat EBS was entitled to continue to pursue the debtor’s husband in respect of the debtfor which he was jointly and severally liable together with the debtor. However, Baker J.pointed out that, at a practical level, EBS might not be in a position to recover possessionof the property in circumstances where the property was occupied by the debtor and herchildren and in circumstances where the debtor was honouring the terms of the proposedarrangement. Baker J. pointed out that this practical difficulty for EBS in pursuing thedebtor’s husband was caused not by the terms of the arrangement but by the extent ofthe negative equity in the family home. The full extent of that negative equity hadalready been priced into the arrangement which the debtor would be obliged toimplement and honour. If the debtor performed her obligations under the arrangement, itwould be difficult for EBS in that case to pursue the debtor’s husband since they would bemet with the argument that the debtor was herself entitled to remain in the property (solong as she honoured the terms of the proposed arrangement) and, given the extent ofthe negative equity, no useful purpose would be served by granting relief against thehusband.16. Section 116 (6) was also considered by me in two judgments. In the first of those cases,namely Lisa Parkin [2019] IEHC 56 I had to consider whether a secured creditor(Permanent TSB) would be unfairly prejudiced as a consequence of an arrangemententered into solely by the debtor who, like in the present case, was jointly and severallyliable together with her estranged husband on foot of the relevant mortgage loan. Inparas. 67-68 of my judgment in that case, I expressed the view that s. 116 (6) makes itvery clear that the arrangement will not in any way impede the ability of the securedcreditor to pursue the debtor’s husband. At para. 68 I said:-“68. In light of these statutory provisions, I can see no reason why PTSB would not beentitled to pursue a claim against Mr. Parkin, including a claim to enforce themortgage against him. It may well transpire that if such steps are taken by PTSB,there will be an issue as to the extent of the beneficial interest of Mr. Parkin in theprincipal private residence. That is not an issue on which I can or should expressany view at this stage. What is clear is that, even if an order is made affirming theorder of the Circuit Court, PTSB will not be prevented from pursuing Mr Parkin inrespect of his ongoing indebtedness to it and will not be prevented from takingenforcement proceedings in respect of any interest he may have in the familyhome. It will be a matter for the court in any such proceedings to determine whatrelief might appropriately be granted and I can neither prejudge nor predict theoutcome of any such proceedings.”17. Subsequently, in Ahmed Ali [2019] IEHC 138 a similar issue arose. In that case, thesecured creditor had already obtained an order for possession against the debtor’sestranged wife who had been adjudicated a bankrupt but was subsequently dischargedfrom bankruptcy. In the course of her bankruptcy, the secured creditor had indicatedthat it wished to value its security. As a consequence, its only remedy against her was torely on its security. It was argued on behalf of the secured creditor that the bank wouldPage 7 ⇓be greatly prejudiced by the arrangement since it would have the effect of preventing itfrom exercising its right of recourse against the security (i.e. the family home). However,I came to the conclusion that the bank would not be unfairly prejudiced. At paras. 50-51of my judgment I said:-“50. The circumstances … are very unusual. Ordinarily, as I sought to explain in LisaParkin … the bank would not be prevented, by the existence of a PIA in respect ofone joint and several debtor, from pursuing another joint and several debtor who isnot a party to the same or an interlocking PIA. But, in this case, it is clear that, ifthe PIA proposal is approved, the bank will no longer be able to take possession ofthe …property notwithstanding the order for possession already obtained againstMrs Ali. In the course of the hearing, I suggested to counsel that although the bankcould clearly no longer seek possession of the … it might be possible for the bank topursue its claim as against Mrs. Ali by seeking a sale of the property in lieu ofpartition. As the decision of the Supreme Court in Irwin v. Deasy [2011] 2 IR 752at p. 778, shows, a mortgagee (other than a judgment mortgagee) is entitled topursue the remedy of partition. However, on further reflection, it seems to me to beunlikely that the bank could realistically pursue an action for sale in lieu ofpartitions (sic). I note from para. 52 of Mr. Baxter’s affidavit, that the bank valuedits security for the purposes of the bankruptcy of Mrs. Ali at €192,200. Given thatthe bank will recover more than that sum under the PIA, it is difficult to see thatthe bank would be in a position to pursue an action for sale in lieu of partition.However, I make no finding to that effect. It will be for the bank to decide whatremedy it may have in relation to the indebtedness of Mrs. Ali to it and I would notwish to prejudge in any way the outcome of any proceedings that the bank mightbe advised to take.51. For the purposes of these proceedings …, I have come to the conclusion that thebank is not unfairly prejudiced by the proposed arrangement. In the first place, asnoted above, the bank will recover more, under the PIA, than it would in the eventof the bankruptcy of Mr. Ali. Furthermore, if one looks at the value which the bankplaced on its security in the bankruptcy of Mrs. Ali, the bank will also recover moreunder the proposed PIA than it would recover if it were to proceed with possessionproceedings against the property (having valued its security at €192,200).”18. Counsel for the bank submitted that in Ahmed Ali the issue was framed solely as a matterof unfair prejudice and there was no consideration of the effect of s. 116 of the 2012 Act.It was submitted on behalf of the bank that s. 116 does not qualify the rights of securedcreditors as against non-arranging borrowers in any way and in particular does not makethose rights subject to a test for prejudice. Instead, it provides a stand-alone protectionfor the contractual rights of creditors to rely on their security as against non-arrangingdebtors. I do not disagree with this submission save to note that this was not anargument that was raised in the notice of objection filed on behalf of the bank.Furthermore, in most of the cases in which an issue has arisen in relation to s. 116, theargument made on behalf of the relevant secured creditor is that the arrangement wouldPage 8 ⇓in some way impede its ability to exercise its rights under s. 116 (6) such as to give riseto an unfair prejudice.19. The bank draws attention to the fact that, as a consequence of the bankruptcy of Mr.Egan, his interest and that of Ms. Forde Egan in the family home are now severed. Thisseverance occurred as a matter of law. Under s. 44 (1) of the 1988 Act, all propertybelonging to Mr. Egan at the date of his adjudication automatically vested in the OfficialAssignee for the benefit of his creditors.20. As Sanfey & Holohan “Bankruptcy Law & Practice”, 2nd ed., 2010, explain at para. 9-19,the effect of the adjudication is to sever the joint tenancy in a jointly owned family homeand convert it into a tenancy in common. The non-bankrupt spouse and the OfficialAssignee then hold separate and undivided moieties in the property. Thus, in the presentcase, when Mr. Egan was adjudicated a bankrupt, any interest which he had in the familyhome vested in the Official Assignee. However, it is important to bear in mind that thereis no evidence before the court as to the extent of his equity in the property. For thereasons discussed in para. 26 below, it may have been very limited.21. As noted in para. 2 above, Mr. Egan has since been discharged from bankruptcy. Thebank submits that, as a consequence of the provisions of s. 85 (3A) of the 1988 Act (asamended) Mr. Egan now holds, on a purely several basis, the interest previously vested inthe Official Assignee. The bank submits that the effect of this statutory provision is thatthe former joint tenancy that existed between Ms. Forde Egan and her husband remainssevered. Section 85 (3A) of the 1988 Act provides that, on the 3rd anniversary of theadjudication in bankruptcy, the estate or interest of the bankrupt in the family home willre-vest in the bankrupt. Section 85 (3A) is in the following terms:-“(3A) Subject to subsections (3B) to (3F), where on the 3rd anniversary of the date of themaking of the adjudication order in respect of a bankruptcy—(a) the unrealised property of the bankrupt referred to in subsection (3) includesan estate or interest in what was, at the date of the making of theadjudication order, the family home, shared home or principal privateresidence of the bankrupt, and(b) in the case of the family home or shared home, the Official Assignee has notapplied to the Court for an order for sale of that home,that estate or interest shall, on that 3rd anniversary, stand re-vested in thebankrupt without the need for any conveyance, assignment or transfer.”22. It might be thought that s. 85 (3A) has no application in the present case given that Mr.Egan was declared a bankrupt as long ago as 2009 and this amendment to the 1988 Actwas only made in 2016 as a consequence of s. 10 of the Bankruptcy (Amendment) Act,2015 (“the 2015 Act”) which was commenced on 29th January, 2016 by S.I. 34/2016.However, it is clear from s. 85 (3F) that s. 85 (3A) is intended to have retrospectivePage 9 ⇓effect. Section 85 (3F) provides that, where the adjudication order was made more thantwo years and six months prior to coming into operation of s. 10 of the 2015 Act, thereference in s. 85 (3A) to the third anniversary is instead to be taken to be a reference tothe day falling six months after the day s. 85 (3A) came into operation (namely 29thJanuary, 2016). In those circumstances, the bank submits (in my view correctly) that Mr.Egan’s interest (whatever that may have been) in the family home re-vested in him byoperation of s. 85 of the 1988 Act (as amended) on or about 30 July, 2016. As noted inthe written submissions delivered on behalf of the bank, the 1988 Act (as amended) doesnot provide that the re-vesting has the effect of restoring the joint tenancy. As aconsequence, the bank submits that Mr. Egan and Ms. Forde Egan now hold separatemoieties in the family home as tenants in common. This seems to me to be correct to theextent of any interest held by Mr Egan in the home.23. On the basis that Mr. Egan and Ms. Forde Egan now hold separate moieties in the familyhome as tenants in common, it is submitted by the bank that:“…in circumstances where a Debtor owns only 50% of the PPR, that she cannotoffer 100% of the value of the PPR as security for the mortgage loan for which sheis – on foot of the co-borrower’s bankruptcy – now solely liable to the Bank”.24. On the basis of the scenario described in paras. 22 to 23 above, the bank essentiallymakes two submissions:-(a) In the first place, the bank submits that the court cannot approve the arrangementunder s. 115A (9) in circumstances where it would be necessary to sell or partitionpart of the family home for the purposes of upholding the right of the bank to relyon its security over the family home as against Mr. Egan. This submission is madein light of the provisions of s. 104 (1) and s. 115A (9) (b) (iii) of the 2012 Act.Under the latter provision, the court cannot make an order confirming the cominginto effect of a proposed arrangement unless the court is satisfied that there is areasonable prospect that confirmation of the arrangement “will…enable the debtornot to dispose of an interest in, or not to cease to occupy, all or a part of his or herprincipal private residence”. The bank submits that this condition cannot besatisfied in the present case in circumstances where, under s. 116 (6) it must beentitled to pursue a remedy against Mr Egan under s. 31 (2) (a) of the Land andConveyancing Law Reform Act, 2009 (“the 2009 Act”) under which the bank couldseek an order for partition of the family home or an order for sale of the familyhome in lieu of partition.(b) Secondly, the bank draws attention to the observation made by me in Ahmed Ali atpara. 50 that it seemed to me to be unlikely that the bank in that case couldrealistically pursue an action for sale in lieu of partition in circumstances where thebank was likely to recover more under the proposed arrangement in that case thanit would by seeking to enforce the mortgage over the interest of the ex-wife of Mr.Ali in the family home (in circumstances where the bank had valued its security at afigure less than the amount that would be paid to it under the terms of thePage 10 ⇓arrangement). The bank argues, however, that it would be unfair and prejudicial toits interests if it were to be precluded from realising Mr. Egan’s “50%” share in thefamily home. As set out in para. 6.5 of the bank submissions, the case made by itin this context is as follows:-“6.5 It is a term of the proposed Arrangement that the debt due to the Bankwhich is secured on the PPR – which was valued at €410,000.00 – is to bewritten down from €624,457.00 to €451,000.00. Accordingly, incircumstances where the Debtor’s interest is worth only €205,000.00, it isrespectfully submitted on behalf of the Bank that it would be unfair andprejudicial for the Bank’s interests if the Bank were to be precluded fromrealising the other 50% of its security.”25. In paras. 28 to 33 below, I deal, in turn, with these two limbs of this element of theobjection made on behalf of the bank. Before doing so, I should make clear that, in myview, the bank is not correct in characterising the effect of the arrangement as an offer byMs. Forde Egan as owner of “only 50% of the PPR” to offer 100% of the value of the PPRas security for the mortgage loan for which she is now solely liable to the bank (as aconsequence of the bankruptcy of Mr. Egan). In the first place, the bank has offered noevidence to support its contention that Ms. Forde Egan owns only 50% of the familyhome. While the bank may argue that the onus of proof lies on the practitioner in anapplication of this kind, it is noteworthy that at no time in the course of the Circuit Courtproceedings was any such issue raised by the bank. The notice of objection makes noreference to it. Likewise, the affidavit of John Nolan sworn on behalf of the bank insupport of the objection makes no reference to it. There was therefore no reason why thepractitioner or Ms. Forde Egan should address this issue in their respective evidence inthe course of the Circuit Court proceedings. The issue was raised for the first time in thewritten submissions delivered on behalf of the bank in the weeks immediately prior to thehearing in October 2019. In these circumstances, I do not believe that it is correct toassume that Ms. Forde Egan and Mr. Egan have each a 50% interest in the family home.Given Mr. Egan’s bankruptcy, Ms. Forde Egan may well have a greater equity than him inthe family home to the extent that she made payments in part discharge of the mortgageduring the period of his bankruptcy. In this regard, it is noteworthy that when Mr. Nolan,in his affidavit dealt with the conduct of Ms. Forde Egan in relation to payments made onfoot of the mortgage, he referred only to payments made by her. He made no referenceto any payments made by Mr. Egan.26. Secondly, it has not been established that s. 85 (3A) has any application in this case. Incircumstances where it is clear from Mr. Nolan’s affidavit that the debt due to the bankexceeds the value of the property and where the relevant mortgage payments were beingmade by Ms Forde Egan, it seems unlikely that Mr. Egan had any significant equity in theproperty at the time of his adjudication or thereafter and it may even be the case that hehad no equity in it. Accordingly, it is by no means certain that he had an equity in theproperty capable of forming part of the unrealised property of a bankrupt within themeaning of s. 85 (3) of the 1988 Act (as amended). That said, for the purposes of thisPage 11 ⇓judgment, I am prepared to assume that he has some level of equity in the family homeand that s. 85 is engaged.27. Thirdly, and more importantly, it is simply wrong to suggest that Ms. Forde Egan “cannotoffer 100% of the value of the PPR as security for the mortgage loan…”. Ms. Forde Eganis making no such offer under the terms of the proposed arrangement. The security isalready in place. The purpose of the arrangement is to restructure the debt owed by Ms.Forde Egan. The arrangement does not affect the underlying security in any way. Priorto the arrangement taking effect, Ms. Forde Egan remained liable in full for the debt dueto the bank. The fact that the interest in the property which forms security for that debtmay be affected by the bankruptcy makes no difference to the extent of Ms. Forde Egan’sliability. As explained by Baker J. in J.D., Ms. Forde Egan is entitled under the 2012-2015Acts (through her practitioner) to propose an arrangement with her creditors under whichher indebtedness would be written down to a more viable level. That is so whether herdebts are secured or unsecured. It is equally so irrespective of the value of the security.In no sense is she offering anything by way of security. She is simply seeking tocompromise the level of her indebtedness to her creditors without disturbing the existingsecurity in any way.The argument based on s. 115A (9) (b) (iii)28. As noted in para. 24 (a) above, the court is precluded by s. 115A (9) (b) (iii) from makingan order confirming the coming into effect of a proposed arrangement if the court cannotbe satisfied that there is a reasonable prospect that confirmation of the proposedarrangement will enable the debtor “…not to dispose of an interest in, or … not to cease tooccupy all or a part of his or her principal private residence”. The argument of the bank isthat, since it cannot be prevented from taking action against Mr. Egan to enforce itssecurity (most likely by an action for partition or for sale in lieu of partition) the conditionset out in s. 115A (9) (b) (iii) cannot be satisfied in this case. The bank argues that,inevitably, its right to enforce its security against Mr. Egan must mean that the courtcannot be satisfied that there is a reasonable prospect that confirmation of the proposedarrangement will enable Ms. Forde Egan to remain in the family home.29. The first point to be made is that there can be no doubt but that the bank is entitled,notwithstanding any order made in these proceedings, to take such action as it may beadvised to enforce its security as against Mr. Egan. That is clear from the decision ofBaker J. in J.D. It is also clear from the express terms of the proposed arrangement inthis case. As in J.D., the proposed arrangement, here, includes standard terms 10.3 and10.4. More importantly, even if it be the case that the liability of Mr. Egan and Ms. FordeEgan is now several rather than joint and several, the judgment of Baker J. in J.D. putsbeyond doubt that s. 16 (6) can be relied upon by the bank notwithstanding that it refersto “a person who has jointly contracted with the debtor or is jointly liable with thedebtor…” (emphasis added).30. Given the undoubted right of the bank to pursue action against Mr. Egan, whether bypartition or by an order for sale in lieu of partition, it might seem to follow, as a necessaryconsequence, that s. 115A (9) (b) (iii) cannot be satisfied. However, in my view, it wouldPage 12 ⇓be entirely wrong to reach that conclusion. I have formed that view for a number ofreasons:-(a) In the first place, all that needs to be established is that there is a “reasonableprospect” that confirmation of the proposed arrangement will ensure that Ms. FordeEgan can remain in the family home. A reasonable prospect clearly does notrequire that there must be absolute certainty that confirmation of the arrangementwill bring about that result.(b) Secondly, I am satisfied that there is a reasonable prospect that confirmation of theproposals will achieve that result. In this context, while the bank is undoubtedlyfree to pursue such action as it may be advised in relation to the realisation of anyinterest held by Mr. Egan in the family home, there are significant practical hurdlesfacing the bank in taking any such action. There is no certainty that a court will beprepared to grant relief under s. 31 of the 2009 Act. It is clear from the languageof s. 31 (3) of the 2009 Act that the jurisdiction of the court to make orders forpartition (or sale in lieu of partition) under s. 31 is discretionary. It is likely that, inthe exercise of its discretion, the court will be influenced by the approach taken bythe courts under the predecessor legislation that was in place prior to theenactment of the 2009 Act. As discussed in the judgment of Finnegan J. (as hethen was) in the Supreme Court in Irwin v. Deasy [2011] 2 IR 752 at p. 780, thecourt would not make an order for sale in lieu of partition (under the predecessorlegislation) where good reason was shown as to why such an order should not bemade. While this defence was based on the language of s. 4 of the Partition Act,1868, it is instructive to have regard to the approach taken by the Irish courts inrelation to that provision. The decision of Denham J. (as she then was) in FirstNational Building Society v. Ring [1992] 1 IR 375 (one of the authorities to whichFinnegan J. drew attention in Irwin v. Deasy) is particularly instructive. In thatcase, Denham J. refused to make an order for sale in lieu of partition incircumstances where the co-owner was an innocent party who, together with herfamily, would suffer considerably if her part of the family home were sold.(c) Thirdly, there are a number of factors in the present case which seem to me to beof relevance to any proceedings that may be taken by the bank to enforce itssecurity as against Mr. Egan. These include:-(i) The fact that, under the proposed arrangement, the bank stands to be paidmore than it will be paid by realising its security over any interest which Mr.Egan may have in the family home. In this context, on the basis of the casemade by the bank, the most that the bank would recover through a sale ofMr. Egan’s interest in the family home (based on the agreed valuation of theproperty) is €205,000. In contrast, the bank will be paid more than thevalue of the property under the proposed arrangement. It will be paid€451,000 (which is €41,000 more than the agreed value of the property) byway of capital. It will also be paid an additional €40,651 by way of dividend.Page 13 ⇓In addition, it will be paid interest under the mortgage. I find it difficult tounderstand why, in such circumstances, the bank would pursue an action forsale in lieu of partition. It would seem to be entirely counterproductive to doso. More importantly, I believe that it will be difficult to satisfy a court that itis appropriate to make an order for sale in lieu of partition in suchcircumstances (assuming that payments are being made to the bank asenvisaged by the proposed arrangement). While it would be both impossibleand wrong to seek to predict the outcome of such an application, it would beequally wrong to shut my eyes to the factors outlined above.(ii) It is also significant that the bank has not revealed what value it placed on itssecurity following Mr. Egan’s adjudication as a bankrupt. Given that theadjudication took place in 2009, it may well be the case that the value placedon the security was less than the figure of €205,000. In my view, that is anissue that should have been addressed on affidavit by the bank if it was tomake the argument now pursued by it. The court should have been apprisedof all relevant facts in order to form a view as to whether the pursuit of anyenforcement proceedings against Mr. Egan would put in jeopardy anyarrangement proposed under the 2012-2015 Acts in respect of the debts ofMs. Forde Egan. Whether Mr. Egan’s interest in the property is worth€205,000 or something less than that, it seems to me that there aresignificant practical difficulties facing the bank in seeking to bringenforcement proceedings against Mr. Egan. I also note that the bank has, atno stage, in these proceedings explained why it has not previously takenaction against Mr. Egan. In the written submissions delivered on behalf ofthe bank, it was suggested that the explanation for not taking action againstMr. Egan before now was “forbearance” on behalf of the bank. However, thematter is not addressed on affidavit by Mr. Nolan and the court therefore is inno position to understand why the bank did not pursue any form of action toenforce its security against Mr. Egan notwithstanding that he was adjudicateda bankrupt as long ago as 2009.31. In all of the circumstances described in para. 30 above, it seems to me that the outcomeof any proceedings to enforce or realise the bank’s security as against Mr. Egan is souncertain that it is appropriate and safe to conclude that, if the court were to confirm theproposed arrangements, there is, at minimum, a reasonable prospect (and, in truth, alikely prospect) that this will secure the continued occupation of the family home by Ms.Forde Egan and her children.The argument that it would be unfair and prejudicial to the bank’s interests if thebank were to be precluded from realising the interest of Mr. Egan in the family home32. As noted above, the argument here is that it would be unfair and prejudicial to the bank’sinterests if it were to be precluded from realising its security over Mr. Egan’s interest inthe family home. This argument appears to proceed on the basis that, as acknowledgedby me in Ahmed Ali (and as further acknowledged in para. 30 above), there are likely tobe significant practical difficulties facing the bank in enforcing its security over Mr. Egan’sPage 14 ⇓interest in the event that the arrangement proposed on behalf of Ms. Forde Egan isconfirmed.33. In my view, this argument is largely answered on the same basis as the argumentaddressed in paras. 28-31 above. It seems to me to be entirely unreal to suggest thatthe bank will be unfairly prejudiced if, for practical reasons, it is simply not feasible forthe bank to pursue enforcement against Mr. Egan as a consequence of the confirmation ofthe proposed arrangement. This is for the very simple reason that the bank will faremuch better under the proposed arrangement than it would by pursuing action againstMr. Egan (whether by way of partition or by way of sale in lieu of partition) to enforce itssecurity over his interest in the family home. As noted above, under the arrangement,the bank will be paid €451,000 by way of capital (which represents a significant increaseabove the market value of the family home). In addition, the bank will be paid interestand it will also be paid a dividend of €40,651. In contrast, in the event of a bankruptcy,the bank, as appendix 5 to the proposed arrangement shows, would recover no morethan €369,000. This would represent a return of 60 cent in the euro to the bank. This isto be compared with the outcome under the arrangement. As appendix 5 demonstrates,the bank will receive 72 cent in the euro under the proposed arrangement. It is thereforeimpossible to see how the bank will be unfairly prejudiced in the manner suggested in thesubmissions made on its behalf.The banks alternative case on unfair prejudice34. It is also submitted on behalf of the bank that the proposed arrangement is unfair,inequitable and unfairly prejudicial to its interests in circumstances where (so the bankcontends) Mr. Egan, as a former bankrupt, “will enjoy continued residence in the PPRwhile refusing to make his assets available to the Bank in reduction of the debt securedon that property…”. The bank, nonetheless, acknowledges that the proposed arrangementwill not work unless Mr. Egan contributes to the monthly payments to be made to thebank in respect of the mortgage debt.35. In Mr. Nolan’s affidavit, he highlights that Mr. Egan will be entitled to a pension lump sumin the amount of approximately €80,000 in 2021 which could be used in whole or in partto reduce the mortgage debt to the bank. At paras. 7.7 to 7.8 of the written submissionsdelivered on behalf of the bank the case is made that the effect of the proposedarrangement is to frustrate the entitlement of the bank to realise its security as againstMr. Egan while, at the same time, putting any future acquired assets including his pensionbeyond the reach of his creditors. The bank submits that such a proposal is “so self-evidently unfair and prejudicial” to the rights and interests of the bank that the court isprecluded by s. 115A (9) (e) and (f) from confirming it. This submission seems to me tobe based on the theory that the bank will be prevented, by this arrangement, from takingaction against Mr. Egan. This is wrong. As I have sought to explain, the bank is fullyentitled to take such action as it may be advised against Mr. Egan. While I believe that itmay well ultimately be difficult to persuade a court that any order should be made unders. 31 of the 2009 Act, it would be plainly inappropriate to prejudge the outcome of anysuch application. The bank will be fully entitled, in any such proceedings, to drawPage 15 ⇓attention to any factors that may influence the exercise of the court’s discretion undersection 31. The bank will therefore be free to draw attention to any pension lump sumpayment or other assets that may be available to Mr. Egan.36. In the meantime, I do not believe that the pension assets of Mr. Egan are a matter towhich I can properly have regard in the context of the present application. They are notassets of Ms. Forde Egan. As the decision of Baker J. in J.D. illustrates, Ms. Forde Egan isentitled, through the practitioner, to make her own application for relief under the 2012-2015 Acts. Moreover, Mr. Egan could not have brought an interlocking application at thesame time as the application was made by Ms. Forde Egan. He was not eligible for apersonal insolvency arrangement at that time. It is clear from the papers before thecourt that he was not discharged from bankruptcy until 2014. Under s. 91 (1) (i) (iv) ofthe 2012 Act, Mr. Egan would have been ineligible for a personal insolvency arrangementat the time the protective certificate was sought in this case. Under s. 91 (1) (i) (iv), aperiod of five years must elapse from the date of discharge from bankruptcy before adebtor can become eligible for a personal insolvency arrangement.37. Moreover, I must bear in mind that, on the basis of the material before the court, it isclear that the arrangement proposed by the practitioner on behalf of Ms. Forde Egan willachieve a better result than the alternative of making Ms. Forde Egan a bankrupt. Whilethat is not the only test of unfairness, it is a very important litmus test. In the context ofan examinership, it was described by O’Donnell J. as a “vital test” in his judgment in theSupreme Court in McInerney Homes Ltd [2011] IESC 31 at para. 30 where he said:-“30. In this case, the trial judge’s approach to the question was to view the schemeagainst the likely return to affected creditors under the likely alternative in theevent that there was no examinership, and no successful scheme. I agree that thatis a vital test. …”38. Before reaching any final conclusion on the issue of unfair prejudice, I should, however,first address the case made by the bank that, contrary to the requirements of s. 115A (9)(b) (ii), the proposed arrangement will not enable the bank to recover the debt due to itto the extent that the means of Ms. Forde Egan reasonably permits. If the bank is correctin that contention, that would also provide a proper basis to form the view that the bankwould be unfairly prejudiced by the proposed arrangement. On the other hand, if I findagainst the bank on that issue, the argument on unfair prejudice will, for all of thereasons outlined above, fall away.Section 115A (9) (b) (ii)39. Under s. 115A (9) (b) (ii), the court must be satisfied that there is a reasonable prospectthat confirmation of the proposed arrangement will enable the creditors of Ms. Forde Eganto recover the debts due to them to the extent that the means of the debtor reasonablypermit. In dealing with the bank’s concerns in relation to the s. 115A (9) (b) (ii) issue,Mr. Nolan, in his affidavit, suggests that more significant payments will be made indischarge of the mortgage debt during the currency of the proposed arrangement than inthe seventeen-year period thereafter. In para. 20 of his affidavit Mr. Nolan says that thePage 16 ⇓monthly payments to be made during the currency of the arrangement will rise to€2,653.00 per month in years 5 and 6 but, thereafter, only €1,780.00 per month will bepaid for the remaining seventeen years. He also draws attention again, in this context, tothe pension lump sum of approximately €80,000.00 which will be paid to Mr. Egan in2021. He suggests that, in these circumstances, the resources available to Ms. FordeEgan would allow her to make more extensive monthly payments to the bank for theremaining term of the mortgage than €1,780.00.40. In my view, the very detailed and comprehensive affidavit sworn by Ms. Forde Egan inresponse to the affidavit of Mr. Nolan provides an answer to the concerns raised by Mr.Nolan. In the first place, Ms. Forde Egan explains that the payments to be made to thebank during the currency of the proposed arrangement include not only the ongoingmortgage payments that will require to be made but also payment of the significantdividend that will be paid to the bank in respect of the unsecured element of the debt.Ms. Forde Egan also explains that, in order to fund the payments to the bank, Mr. Egan,notwithstanding that he has no ongoing liability to the bank for repayment of any part ofthe loan, is making his income available to assist in making the monthly payments underthe arrangement. I should explain, at this point, that, as a discharged bankrupt, Mr.Egan has no ongoing liability to the bank in respect of the mortgage debt. The bank’sonly entitlement to pursue Mr. Egan is in respect of his interest (whatever that might be)in the family home. The bank is entitled to pursue that claim to the extent of thatinterest and subject to the value which it placed on the security at the time of Mr. Egan’sbankruptcy.41. Ms. Forde Egan also explains, in considerable detail, the particular difficulties facing thefamily arising from the health condition of one of the children which will require ongoingsupport into the future. Given the highly personal nature of the evidence that is given byMs. Forde Egan, I do not believe that it would be appropriate to discuss it in any detail inthis judgment. It is sufficient to record that, in contrast to many of the cases which comebefore the court, Ms. Forde Egan provides extensive detail in relation to the issue fromwhich it is clear that two of her children will still be in third level education after theproposed arrangement comes to an end and one of them will require ongoing support andassistance into the future.42. In the circumstances, it is understandable that this issue (although raised in the notice ofobjection and in Mr. Nolan’s affidavit) was not pursued in either the written submissionsor in the oral submissions of counsel at the hearing of this appeal.43. It seems to me to be clear on the basis of the evidence before the court that the means ofMs. Forde Egan are fully brought to bear under the proposed arrangement. In thiscontext, I should also record, at this point, that, as set out in appendix 2 to the proposedarrangement, the income used to fund the arrangement and the ongoing living expensesof the family has been supplemented by income from a border. In many cases whichcome before the court, objecting creditors have highlighted alleged failures on the part ofa debtor to maximise their available income by failing to take in borders or tenants. ThePage 17 ⇓fact that, in this case, the family has taken in a border provides additional evidence todemonstrate that the means of Ms. Forde Egan are being brought to bear for thepurposes of the proposed arrangement.44. As noted above, Mr. Nolan, on behalf of the bank, also draws attention, in the context ofs. 115A (9) (b) (ii) to the lump sum pension to be paid to Mr. Egan in 2021. I do not,however, believe that a pension payment to a person who is not himself or herself thedebtor can be taken into account under s. 115A (9) (b) (ii). That subsection is concernedwith the means of the debtor and with no one else. Moreover, it must be borne in mindthat Mr. Egan, as a consequence of his bankruptcy, has been relieved of his personalliability for the debts in respect of the mortgage. While the bank is clearly aggrieved thatMr. Egan will receive this payment, his entitlement to receive it free of any ongoingliability to the bank arises as a matter of law. He has borne the pain of bankruptcy and,like every other discharged bankrupt, he is now free from his pre-existing indebtedness.In the meantime, it remains open to the bank, pursuant to s. 116 (6) of the 2012 Act, toseek to enforce its security over whatever interest he may have in the family home.45. It is noteworthy that the bank did not raise any objection under s. 115A (9) (a) underwhich the court must be satisfied that the terms of the proposed arrangement have beenformulated in compliance with s. 104. Although this point has not been raised by thebank, it is one which I must, nonetheless, consider for the purposes of determining thisappeal. It is one of the preconditions to the making of an order under s. 115A (9). Thesignificance of s. 104 of the 2012 Act is that, in formulating a proposal for anarrangement, the practitioner must have regard to the matters described in s. 104 (2).Among the matters described in s. 104 (2) is that set out in s. 104 (2) (c) namely:-“the ability of other persons residing with the debtor in the principal privateresidence to contribute to the costs [of, inter alia, mortgage loan repayments…andnecessary maintenance in respect of the principal private residence]”46. As Mr. Egan is living with Ms. Forde Egan, his ability to contribute to the cost of themortgage repayment is a matter that the practitioner was required to take into account informulating the proposed arrangements.47. In para. 9 of her affidavit, Ms. Forde Egan explains that Mr. Egan supports thearrangement proposed here and is happy to make all his income available to assist in thearrangement. It is further acknowledged in para. 7.2 of the bank’s written submissionsthat a contribution will be made under the arrangement by Mr. Egan. It is therefore clearthat the proposed arrangement does have regard to the ability of Mr. Egan to contributeto the cost of the mortgage loan repayments. It is, however, equally true, that thearrangement does not envisage that any part of the lump sum pension payment to bemade in 2021 to Mr. Egan will be applied in discharge of the mortgage debt or indischarge of any of the other debts of Ms. Forde Egan. It is also clear from the papersbefore the court that Mr. Egan will contribute, on an ongoing basis, to the reasonableliving expenses of the household.Page 18 ⇓48. With regard to the lump sum pension payment to be made in 2021 to Mr. Egan, I do notbelieve that it would have been appropriate, in the particular circumstances of this case,to take that into account in formulating the proposed arrangement. I have come to thatconclusion for a number of reasons:-(a) In the first place, this represents the payment of pension to Mr. Egan to provide asource of income into the future after Mr. Egan’s working life comes to an end.While I do not exclude the possibility that it would be appropriate, in some cases, totake a pension payment to be made to a person living in the same home as thedebtor into account, I do not believe that it is appropriate to do so in this casegiven the particular circumstances of the family as described by Ms. Forde Egan inher affidavit;(b) It also has to be borne in mind that Mr. Egan has no ongoing liability to make anypayment to the bank himself. He has been relieved of that liability as aconsequence of his discharge from bankruptcy. Given the particular familycircumstances facing his family, it is understandable that he would not wish tomake the lump sum in question available in part discharge of the mortgage debtnow owed solely by his wife, Ms. Forde Egan;(c) Most importantly, as noted above, it is clear that Mr. Egan will, under the proposedarrangement, make contributions to the ongoing cost of the mortgage repaymentsand of the household expenses. There has accordingly been compliance with s. 104(2) (c). In the circumstances, I do not believe that it would be open to me toconclude, on the particular facts of this case, that there has been a failure tocomply with s. 104. It seems to me to follow that no issue arises in this case unders. 115A (9) (a).It also seems to me to follow that, for the respective reasons outlined in paras. 38and 43 above, the bank’s case on unfair prejudice (discussed in paras. 34 – 38above) must fall away.Was the proposed arrangement supported by a valid class of creditors for thepurposes of s. 115A (9) (g)?49. This was not an issue that was canvassed in the written submissions or in the oralsubmissions of counsel on behalf of the bank. It was, however, raised in the notice ofobjection and in the affidavit of Mr. Nolan. It is also a matter that I must consider for thepurposes of this appeal.50. Section 115A (9) (g) requires the court to be satisfied that at least one class of creditorshas accepted the proposed arrangement by a majority of over 50% of the value of thedebts owed to that class. In this case, the practitioner suggested that there were twoclasses who had voted in favour of the arrangement namely the “regular unsecuredcreditors” (comprising Allied Irish Bank Plc) and the “hire purchase class of creditors”(namely Close Brothers Motor Finance). In my view, neither of these constitute classes inthemselves. However, it seems to me that both Allied Irish Banks Plc and Close BrothersMotor Finance together form a separate class of creditors from the bank and the Bank ofPage 19 ⇓Ireland. Neither the bank nor Bank of Ireland can be placed in the same class as AlliedIrish Banks Plc and Close Brothers Motor Finance. In the first place, the bank is theholder of a mortgage over the principal private residence of Ms. Forde Egan. It is wellestablished that such a creditor is in a different class to the remaining creditors of adebtor. This was established in the decision of Baker J. in Sabrina Douglas [2017] IEHC 785.Both the bank and Bank of Ireland are related companies. It seems to me that, inthose circumstances Bank of Ireland cannot be placed in the same class as the remainingunsecured creditors of Ms. Forde Egan. As a related company of the bank, it wasinevitable that it was going to vote in the same way as the bank. Even if I am wrong intreating Bank of Ireland in that way, this would make no difference. It is clear that thevalue of the debts owed to Allied Irish Banks Plc and Close Brothers Motor Financesignificantly exceed the debt of €1,313.43 owed to the Bank of Ireland. In thosecircumstances, it seems to me that, whether or not one includes Bank of Ireland as acreditor with the other unsecured creditors of Ms. Forde Egan, the requirements of s.115A (9) (g) are satisfied in this case. More than 50% in value of the unsecured class ofcreditor have voted in favour of the arrangement.51. I must, of course, have regard to the provisions of s. 115A (17) under which I amrequired, to consider the overall number and composition of the creditors who voted atthe creditors meeting and the proportion of the debts of Ms. Forde Egan due to thosecreditors. I appreciate that, in percentage terms, the total debts owed to the unsecuredcreditors is a very small fraction of the amount owed to the bank. Nonetheless, it seemsto me that it would be wholly wrong to ignore the views of the majority of the purelyunsecured creditors of Ms. Forde Egan. The fact that a majority of the unsecuredcreditors has voted in favour of the proposed arrangement seems to me to be veryimportant and I therefore do not believe that it would be appropriate under s. 115A (17)to disregard their vote. Given that Ms. Forde Egan has only four creditors in total, itseems to me that notwithstanding the relatively modest proportion of the debts due tothem, the unsecured creditors should be treated as a valid class for the purposes of s.115A (9) (g) and s. 115A (17).The conduct of Ms. Forde Egan52. Again, this was not an issue that was ventilated in the course of the hearing. However,some reliance is placed on this issue in Mr. Nolan’s affidavit and in the notice of objection.Under s. 115A (10) (a) (i) the court, on an application of this kind, is required to haveregard to the conduct of a debtor within a two-year period prior to the issue of aprotective certificate and in particular to the attempts made by the debtor to seek to payhis or her debts. In Mr. Nolan’s affidavit he says that the total payments made by Ms.Forde Egan in the relevant two-year period running from June 2015 to June 2017 was nomore than €393.75 per month on average which represented only a small fraction of thetotal amount due per month during that time of €2,800. This is an issue which Iaddressed in Richard Featherston [2018] IEHC 683. In para. 19 of my judgment in thatcase, I drew attention to the language of s. 115A (10) which requires the court to haveregard to the payment record of the debtor but does not require the court to dismiss anapplication under s. 115A where the payment record is poor. In para. 21 of my judgmentPage 20 ⇓in that case, I suggested that, where a debtor has demonstrated a contempt for his or herpayment obligations, this factor would weigh against the grant of relief under s. 115A.On the other hand, where the debtor is in a position, through appropriate evidence, todemonstrate that there was an inability to make significant payments during the relevanttwo-year period, the court might be persuaded to grant relief under s. 115Anotwithstanding the poor payment record.53. In this case, Ms. Forde Egan has very fully and comprehensively addressed the familycircumstances and it seems to me that there is sufficient evidence before the court totake the view that, notwithstanding the poor payment record of Ms. Forde Egan duringthe relevant two-year period, this would not, of itself, justify the court refusing theapplication under s. 115A. Moreover, in the period since the protective certificate wasgranted in this case, Ms. Forde Egan (as confirmed in para. 33 of her affidavit) has beenmaking payments in the sum of €1,780 per month towards the mortgage debt. This alsoprovides a very useful indicator of the sustainability of the proposed arrangement whichenvisages monthly payments being made on that scale into the future.The counter proposal made by the bank54. The final issue raised by the bank in its notice of objection and in Mr. Nolan’s affidavitrelates to a counterproposal made by the bank for the treatment of its secured debt. Theterms of the counterproposal are described in para. 26 of Mr. Nolan’s affidavit. The mostmaterial terms can be summarised as follows:-(a) The term of the mortgage would be extended by nine years to 23 years (i.e. whenMs. Forde Egan would be 65 years of age);(b) The monthly repayments in respect of the loan would be €2,200 for the first threeyears of a six-year arrangement;(c) Normal repayments would resume in respect of the fourth and subsequent years ofthe arrangement and for the remaining terms of the loan’(d) The fees of the practitioner would be paid in even instalments over a six-yearperiod;(e) The special circumstances costs in the sum of €142 per month in respect of motorinsurance for Ms. Forde Egan’s eldest child would not be allowed. Nor would thespecial circumstance costs of €230 per month in respect of childcare.55. The counter-proposal is addressed by the practitioner in his replying affidavit sworn on25th July, 2018 in the following terms:-“…the counter-proposal was not appropriate, sustainable or fair in circumstanceswhere the debtor would be required to give up on necessary additionalexpenditures including childcare and medical costs. Such a proposal is unfair andinequitable as consideration of same would risk the debtor’s return to solvency. Isay that the debtor felt that the bank’s counter-proposal was not within thePage 21 ⇓affordability of her household. The debtor also believed the bank’s alternative wasunsustainable. The debtor identified that she will continue to have educationalcosts for the next ten years as well as medical costs as she does not have a medicalcard or health insurance.”56. In addition, the practitioner said, in his replying affidavit, that the only feasible way inwhich the bank could receive payments into the future of €2,653 per month would be toremove all additional expenditure including the provision for a vehicle hire purchaseagreement and childcare costs and instead to apply those monies towards repayment ofthe mortgage. Given the particular circumstances of this family, I believe that thepractitioner is right in what he says. It is clear from the evidence of Ms. Forde Egan thatthis family will have to incur additional expenditure over and above what one wouldnormally find in a two-parent household with three children. It is also clear, havingregard to the special needs of the second child in the family that the additionalexpenditure will continue into the future. In the circumstances, I do not believe that thecounter-proposal represents a sustainable or affordable option.57. It is nonetheless striking that the counter-proposal was made in the terms described byMr. Nolan in his affidavit. Notwithstanding what the bank has said about the allegedunfairness and prejudice to it as a consequence of Mr. Egan remaining in the property,the counterproposal shows that the bank was prepared to deal with Ms. Forde Egan inrelation to repayment of the mortgage loan and it gives the lie to the suggestion that thebank will suffer very significant prejudice as a consequence of an arrangement solely withMs. Forde Egan.Conclusion58. For all of the reasons set out above, I reject the objections which have been made onbehalf of the bank to the application under s. 115A. On the contrary, it seems to me thatall of the requirements of s. 115A are satisfied in this case. Although I have not dealt, inthis judgment, with each of the individual requirements of s. 115A, I confirm that I haveconsidered each one of them and I am of opinion that they have all been satisfied. Itherefore believe that the appeal of the bank must be dismissed and the order of thelearned Circuit Court judge affirmed. I will hear the parties as to whether anyconsequential orders are required.
Re: Taffe & The Personal Insolvency Acts 2012- 2015 [2018] IEHC 468 (03 August 2018)
URL: http://www.bailii.org/ie/cases/IEHC/2018/H468.html
Cite as: [2018] IEHC 468
[New search] [Help]
Judgment
Title:
Re:
Taffe & The Personal Insolvency Acts 2012- 2015
JUDGMENT of Mr. Justice Denis McDonald delivered on the 31st day of July, 2018
Introduction
1. On 29 May 2017, Mr. Ronan Duffy, Personal Insolvency Practitioner, submitted a notice of motion on behalf of the above debtor seeking an order pursuant to s. 115A(9) of the Personal Insolvency Act 2012 (“the 2012 Act”) as inserted by s. 21 of the Personal Insolvency (Amendment) Act 2015 (“the 2015 Act”) for an order confirming the Personal Insolvency Arrangement (“PIA”) in this case notwithstanding that the PIA had not been approved by the creditors of the debtor. Section 115A of the 2012 Act permits the court, in certain circumstances, to make an order confirming a PIA even though a majority of the creditors have voted against it. The jurisdiction of the court to make such an order arises only in circumstances where the debts covered by the proposed PIA include a “relevant debt”. For this purpose, s. 115A(18) defines a “relevant debt” as meaning a debt:-
“(a) the payment for which is secured by security in or over the debtors’ principal private residence, and
(b) In respect of which –
(i) the debtor, on 1 January 2015, was in arrears with his or her payments or
(ii) the debtor having been, before 1 January 2015, in arrears with his or her payments, has entered into an alternative repayment arrangement with the secured creditor concerned”.
2. Having regard to the definition of a “relevant debt”, the underlying intention of the Oireachtas in enacting s. 21 of the 2015 Act (which inserted s. 115A in to the 2012 Act) appears very clearly to have been to provide added protection for the principal residence of a debtor in the case of insolvency – where the debtor has fallen into arrears in respect of the mortgage debt on or before 1 January, 2015. As noted above, s. 115A has quite far reaching consequences in that it will (provided certain conditions are met) permit the court to approve a PIA even though it has been rejected by a majority of the debtor’s creditors. This is illustrated very starkly in the present case.
3. In the case of the above debtor, his principal creditors are the Governor and Company of the Bank of Ireland (“the bank”) the Revenue Commissioners and Pentire Property Finance DAC (“Pentire”). Each of these creditors voted against the PIA. Together, they represent 96.2% of the overall indebtedness of the debtor. Of these three, the bank is by far the largest creditor. The value of the debt owed to the bank is €2,312,157.38 and this represents 78.7% of the debtor’s overall indebtedness. It should be noted that the bank is a secured creditor on foot of two mortgage accounts held by the debtor with the bank – namely account 1531270 in respect of which the current outstanding balance is €441,427.29 and account number 1549808 in respect of which the current balance owed to the bank is €70,660.33, the mortgage debt in each case is secured against a property which is jointly owned by the debtor and his partner Una Kennedy, in respect of which there is, currently, an interlocking application at present pending before the Circuit Court.
4. Two creditors voted in favour of the proposal, namely IG Markets Ltd. (which is owed €108,243.00 or 3.7% of the debtor’s overall indebtedness) and Cabot Financial Ireland Ltd. (which is owed €3,551.70 or 0.1% of the overall indebtedness).
5. Both the bank and Pentire have filed notices of objection in respect of the application pursuant to s. 115 A. There are a range of objections relied upon by each of the bank and Pentire. For present purposes, it is unnecessary to consider, in detail, each of the grounds of objection. This is in circumstances where a hearing has yet to take place in respect of the substantive relief claimed in the notice of motion described in para. 1 above. It should be noted that, at an earlier stage in these proceedings, it was necessary for the court to consider a preliminary objection by creditors to the way in which the motion (described in paragraph 1 above) was formulated. This objection was common to a number of cases which resulted in a consolidated judgment given by Baker J. on 5 February 2018 inRe: Niamh Meeley[2018] IEHC 38. That judgment applies equally to these proceedings and it resolved the preliminary objection in question.
6. This judgment is concerned solely with a further preliminary issue raised by the bank that the debts covered by the proposed PIA do not include a relevant debt (as defined). This is on the basis that the debt secured over the debtor’s home at Ballyhannon Lodge, Ballyhannon, Quin, Co. Clare was not in arrears on 1 January 2015 and there was never any alternative repayment arrangement entered into with the bank in respect of the debtor’s mortgage account with the bank. In making this case, the bank relies on the description of the debtor’s principal private residence in the PIA. It should be noted in this context, that there are a number of references to a principal private residence in the PIA and in the executive summary it is very clearly stated that Ballyhannon Lodge is the principal private residence of the debtor.
7. There is no dispute between the parties that as of 1 January 2015, the debtor was not in arrears with his payments to the bank in respect of the debt secured on Ballyhannon Lodge. Nor is there any dispute that there was never any alternative repayment arrangement with the bank. Thus, if Ballyhannon Lodge is the principal private residence of the debtor, there would be no basis on which to invoke the jurisdiction of the court under s. 115A.
8. However, the debtor has sworn an affidavit in support of the application under s. 115A (and in response to the objection raised by the bank) in which he says that while his family home is at Ballyhannon Lodge, his principal private residence since January 2015 has been Apartment 47, Block E, Smithfield Market, Dublin 7. This is on the basis that he ordinarily resides at this apartment, albeit that he spends his weekends at Ballyhannon Lodge. In paras. 7 – 12 of his affidavit, sworn on 21 November 2017, Mr. Taaffe says: –
“7. I say that since in or about January of 2015 I have been spending the majority of my time in Dublin, and residing in the apartment . . . I say that I used to operate a firm of solicitors, employing five solicitors, and the plan was to spend the majority of time working from Clare, just coming to Dublin when needed. . . In light of the financial collapse, and the fact that I had to make staff redundant, I found myself living and working in Dublin the majority of the time, now operating as a sole practitioner.
8. Indeed, by way of example, over the past month I say that I have been in Dublin 25 out of the last 30 days, only being in Clare for five days in total. . .
9. I say that at the time of the application for a Protective Certificate and at the time of the making of the PIA proposal to creditors, and at the time of the making of the s. 115A application, I ordinarily resided in the Smithfield property. . .
10. I say that I do not suggest that I “ordinarily” reside in two places, nor do I suggest that I have two Principal Private Residence properties. I say and accept that I have one Principal Private Residence, being the apartment in Smithfield and that I ordinarily reside there.
11. I say that my family home is in Clare, where my partner resides with her children, the youngest of whom remains in full-time education.
12. I say that my property is a two-bedroomed apartment. It is located in Smithfield roughly a five-minute walk to both my office and the Four Courts. I say that the property is in average condition. I say that my home is suitable for my needs and appropriate in the circumstances”.
The issue to be resolved
9. In the written submissions that were delivered on behalf of the bank in advance of the hearing of this issue which took place on Monday 16 July 2018, it was suggested that the issues to be determined in relation to the principal private residence (PPR) were as follows: –
(a) Is the debtor entitled to claim that he has two PPRs?
(b) Is the debtor entitled to nominate one property as his PPR for the purposes of advancing the PIA to his creditors and then, if that proposal is rejected by the creditors, nominate a different property as his PPR for the purposes of an application to the court, pursuant to s. 115A confirming the coming into effect of the PIA on different terms to those which had previously been rejected by his creditors?
10. However, in the course of the hearing before me it became clear that there was no dispute between the parties in relation to the first of those issues. Both parties accept that a debtor is not entitled to claim more than one principal private residence. In circumstances where both parties are agreed on this issue, and in circumstances where no argument was heard by me from both sides on this issue, I believe it would be wrong for me to express any view on the question. I note, however, the argument made by the bank, by reference toBlack’s Law Dictionary(10th edition) p. 1384, as to the meaning of the word “principal” – namely: –
“Chief; primary; most important”
This is consistent with the ordinary meaning of the word “principal” as recorded, for example, in theShorter Oxford English Dictionary(5th edition) 2002, volume 2 at p. 2347, where the following is stated: –
“first or highest in rank; most important; foremost; greatest…”
11. While I acknowledge the force of the submission made to me by the bank on this issue, I do not believe that it would be appropriate for me to make any determination on the issue in circumstances where I have not heard any contrary argument on behalf of the debtor and where counsel instructed by the personal insolvency practitioner has confirmed that there is no dispute on this issue in these proceedings. I will therefore assume (without so deciding) for the purposes of this judgment that a debtor cannot have more than one principal private residence.
12. The real issue which therefore arises in this case is whether the debtor is bound by the description of the principal private residence in the PIA such that he is not entitled to rely on any contrary extraneous evidence as to the location of his principal private residence.
13. It should be noted at this point that s. 2 of the 2012 Act defines a “principal private residence” as meaning: –
“… a dwelling in which the debtor ordinarily resides and includes—
(a) any building or structure, or
(b) any vehicle or vessel (whether mobile or not),
together with any garden or portion of ground attached to and occupied with the dwelling or otherwise required for the amenity or convenience of the dwelling;”
14. It will be seen that the key aspect of the definition for present purposes relates to the words “dwelling in which the debtor ordinarily resides”. This is the focus of the affidavit sworn by the debtor on 21 November 2017. As noted in para. 8 above, the debtor maintains that he ordinarily resides in the Smithfield apartment. He explained that while he spends his weekends with his partner in Co. Clare, he spends his working week in Dublin and lives in the Smithfield apartment, during the week for that purpose. It should be noted that, in the course of the hearing before me, Mr. Bernard Dunleavy SC, counsel for the bank, suggested that the debtor was untruthful in what he said in para. 10 of his affidavit (quoted in para. 8 above) insofar as he swore that he does not suggest that he ordinarily resides in two places. Counsel also submitted that it was not true that the principal private residence of the debtor at the time of the PIA was Smithfield. As I understand it, this submission was based upon the fact that (as described in more detail below) the debtor referred to the existence of more than one principal private residence in his Prescribed Financial Statement. It is also based on the fact that (again as discussed in more detail below) the PIA undoubtedly refers to the Co. Clare property as the principal private residence of the debtor.
The submissions of the bank
15. Counsel for the bank made it clear that the bank is not suggesting that the court should engage in an inquiry, at this stage, as to where the debtor’s principal private residence is located. Counsel for the bank submitted that the existence of a “relevant debt” is a “gateway requirement” and the bank says the court must look at Mr. Taaffe’s own application to approve the PIA and determine whether it unlocks this gateway. Counsel submitted that for this purpose the court should not look beyond the description of the principal private residence as given in the PIA. It was also submitted that a debtor is not entitled to address the question of his or her principal private residence in a“freestanding manner” by additional evidence such as the affidavit evidence relied upon by the debtor in this case.
16. In making his submissions, counsel for the bank drew attention to a number of aspects of the 2012 Act, (as amended). In the first instance he drew attention to the provisions of ss. 50 and 52 of the Act. Under s. 50 a debtor is required, as soon as practicable after the appointment of a personal insolvency practitioner, to provide information to the practitioner that fully discloses his or her financial affairs. On receipt of this information the practitioner must in turn examine the information and assist the debtor in completing a Prescribed Financial Statement (PFS).
17. Under s. 50(3) there is an obligation imposed on the debtor to make a full and honest disclosure of his or her financial affairs to ensure that to the best of his or her knowledge the PFS is true, accurate and complete. The significance of the PFS is underlined by the provisions of s. 52 of the 2012 Act. Under s. 52(1) the personal insolvency practitioner is required, on the basis of the information disclosed to him by the debtor under s. 50(1), to advise the debtor of (among other things) the debtor’s eligibility to make a proposal for a Debt Settlement Arrangement or a PIA (as the case may be).
18. Counsel equated the duty imposed on the debtor by s. 50(3) to an obligation of utmost good faith. As explained in para. 58 below, it seems to me that such an obligation is in fact imposed by s. 118(1) in respect of any process involving the debtor under Chapter 4 (which would include the obligation of the debtor under s. 50(3). Mr. Dunleavy also drew attention to the terms of the PFS completed in this case on 25 November, 2016. In the PFS, the apartment at 47E Smithfield Market, was given as the debtor’s principal private residence, in addition, in the liabilities section of the PFS, the amount owed to Pentire was stated to be due in respect of, “Principal private residence lender”. In contrast, the amount owed to the bank was described as being owed to “Financial institutions”.
19. Counsel stressed the importance of the PFS being entirely accurate and complete. In particular, he highlighted the provisions of s. 52(2)(a)(iii) under which the nature and extent of the debts owed by the debtor to his creditors must be stated and, in the case of secured debts, the PFS must also show the nature of the security.
20. In terms of the architecture of the 2012 Act, counsel for the bank then noted that under s. 53 of the 2012 Act, the debtor (having received advice from the personal insolvency practitioner under s. 52(1) that a proposal for an Arrangement should be made) is to instruct the practitioner in writing to make a proposal for either a Debt Settlement Arrangement or a PIA. In turn under s. 54, the personal insolvency practitioner, on receipt of an instruction under s. 53, is obliged to complete a statement, confirming a number of matters including that the practitioner is of opinion that the information contained in the debtor’s PFS is complete and accurate. Such a statement was provided by the personal insolvency practitioner in the present case.
21. It is clear, therefore, that the 2012 Act, places significant emphasis on the need for the PFS to be complete and accurate and the Act envisages that the PFS will form the basis on which decisions will be made as to whether to proceed with formulating a proposal for a PIA.
22. Again, in terms of the architecture of the 2012 Act, counsel for the bank also placed significant emphasis upon the provisions of s. 104. Under s. 104(1) a personal insolvency practitioner in formulating a proposal for a PIA, is required, insofar as is reasonably practicable, to formulate the proposal on terms that will not require the debtor to dispose of this principal private residence or cease to occupy that residence.
23. Section 104(1) also requires the personal insolvency practitioner to have regard to the matters listed in s. 104(2). Those matters are all relevant to the ability of a debtor to continue to reside in his or her principal private residence. The matters include:-
“(a) the costs likely to be incurred by the debtor by remaining in occupation of his or her principal private residence…
(b) the debtor’s income and other financial circumstances as disclosed in the Prescribed Financial Statement,
(c) the ability of other persons residing with the debtor in the principal private residence to contribute to the costs referred to in subsection (2), and
(d) the reasonable living accommodation needs of the debtor and his or her dependants and having regard to those needs the cost of alternative accommodation…”
24. As I understand it, the purpose of placing emphasis on these provisions was to highlight the centrality of the principal private residence in the context of a PIA.
25. Counsel for the bank also stressed that the existence of a “relevant debt” is a “gateway requirement”. In the absence of a relevant debt, an application under s. 115A does not get off the ground, no matter what other debts may exist. Counsel submitted that this was consistent with the underlying purpose of the 2012 Act, which is to assist, insofar as possible debtors to remainin situin their principal private residence.
26. Counsel for the bank then turned his attention to the documents before the court. With regard to the PFS, he drew attention to the way in which the Smithfield apartment was described as the principal private residence of the debtor on p. 5 of the PFS. He highlighted that on the following page of the PFS, the property in Co. Clare is described as “2nd PPR”. However, it should be noted that, as counsel for the personal insolvency practitioner pointed out, p. 6 of the PFS also contains the following information in relation to the Co. Clare property: –
“Debtor’s partner lives in this property and debtor resides there at weekends”
27. Counsel for the bank submitted that p. 6 of the PFS was directly at variance with what is said by the debtor at para. 10 of his affidavit, (quoted in para. 8 above). Counsel also stressed that when it came to the PIA the debtor here presented a case to his creditors which unequivocally identified the Co. Clare property as his principal private residence. This appears in the description of the “material retained assets” on the first page of the executive summary. Both the Co. Clare property and the Smithfield apartment are mentioned in this section of the executive summary. However, it is only the Co. Clare property that is described as the “PPR”. Insofar as the Smithfield apartment is concerned, the PIA states: –
“The debtor resides at the property when working in Dublin.”
28. There are also a number of other references within the PIA which clearly point to the Co. Clare property as the debtor’s principal private residence. For example, the amount shown as being the “mortgage balance” in respect of the debtor’s principal private residence is stated to be €512,088, which represents the debt owed to the bank which is secured against the Co. Clare property. Furthermore, when the executive summary comes to deal with what was described as “income/expenditure jointly with interlocking party”, the figures given in respect of the principal private residence match the payment to be made to the bank, while the payment to be made in respect of the Smithfield apartment is described as being in respect of “Mortgage (Dublin property)”.
29. Insofar as relevant to the issue which currently falls for determination, the section of the executive summary dealing with the main features of the PIA is in the following terms:
“It is proposed that the Debtor’s joint PPR mortgage in respect of the property at Ballyhannon Lodge… be restructured, in accordance with Appendix 7.
It is proposed that the Debtor’s mortgage in respect of the property at apartment 47… Smithfield Market… where he and his partner reside when working in Dublin, be restructured to a more sustainable level in accordance with Appendix 7. The Debtor proposes to retain this property given that he would be making a rental payment of a similar amount.”
30. It is clear from this description of the main features of the PIA that the creditors of the debtor were asked to vote on a proposal which identified the Co. Clare property as the debtor’s principal private residence. Counsel for the bank argues that the debtor, in seeking relief under s. 115A of the 2012 Act, can only seek confirmation of the PIA as it stands. The bank says that the debtor, in the PIA, has very clearly identified the Co. Clare property as his principal private residence. That is the only PIA before the court. That is the only PIA that has been the subject of consideration by the creditors of the debtor. Furthermore, it is the only PIA in respect of which an application is made under s. 115A. In essence, the bank’s case is that the debtor is constrained by his own application. On the basis of the PIA before the court, the only principal private residence is in Co. Clare. There is no “relevant debt” in respect of that property. Thus, the bank argues that the “gateway” provisions are not engaged and the application to confirm the PIA does not get off the ground.
The submissions of the practitioner
31. Counsel instructed by the personal insolvency practitioner, Mr. Keith Farry BL, strongly contested the arguments made on behalf of the bank. He submitted that the bank is incorrect in its approach and in particular in singling out the “relevant debt” requirement as a “gateway” matter that requires to be dealt with on a preliminary basis. Mr. Farry submitted that s. 115A has a number of “gateway” aspects all of which will have to be dealt with, in due course, in the substantive hearing of the application under s. 115A. He drew attention, for example, to the requirement set out in s. 115A (2) that an application under s. 115A cannot be made any later than 14 days after the creditors’ meeting. Mr. Farry said that this was as much a gateway requirement as the relevant debt requirement. He also drew attention to the requirement in s. 115A(9)(g) that at least one class of creditors has accepted the proposed PIA by a majority of over 50% of the value of the debts owed to that class. Counsel suggested that in the circumstances the bank was mistaken in placing so much emphasis on the “relevant debt” as a gateway provision. Counsel stressed that at this stage, no hearing has taken place under s. 115A. In the course of any hearing under s. 115A the court will in due course have to consider each of the mandatory requirements that must be satisfied if s. 115A is to apply. Counsel also emphasised that the only sworn evidence before the court in relation to where the debtor resides is the affidavit sworn by the debtor himself. Counsel submitted that the affidavit (the relevant paragraphs of which are set out at para. 8 above), unequivocally established that it is in the Smithfield apartment that the debtor ordinarily resides. He stressed that there was no counterveiling evidence from the bank.
32. Mr. Farry drew attention to a number of the documents before the court. In the first place, he drew attention to the originating application for the protective certificate dated 30 November, 2016, in which Mr. Taaffe, applied for an order pursuant to s. 95(2)(a) of the 2012 Act, granting a protective certificate in this case. The application states that Mr. Taaffe is “of 47E Smithfield Market, Dublin 7, County ofDublin”. Page 5 of the application gives the Smithfield apartment as the address of the debtor. It gives the Co. Clare address as a “previous address” of the debtor. In this context, it should be borne in mind that the form of application is a standard form and it can sometimes be difficult to adapt the form to the particular circumstances of an individual debtor.
33. Mr. Farry then drew attention to the PFS. He noted that on the cover page of the PFS, the address of the debtor was given as the Smithfield apartment. He also drew attention to the information contained in p. 3 of the PFS where both the value and the extent of the secured indebtedness in respect of the principal private residence are given. The value given for the principal private residence is €250,000. Mr. Farry explained that this relates to the Smithfield apartment. In terms of the debt due to the principal private residence lender, the amount specified is €361,245.30. Mr. Farry highlighted that this is the amount due to Pentire.
34. Mr. Farry also highlighted the unequivocal statement on p. 5 of the PFS where the Smithfield apartment is described as the debtor’s principal private residence. Mr. Farry submitted that the information contained on p. 6 of the PFS (which had been the subject of criticism by Mr. Dunleavy on behalf of the bank) is not, in substance, incorrect although Mr Farry accepts that a debtor cannot have more than one principal private residence. Again, Mr. Farry stressed that the PFS is a standard form. In fact, the form of the PFS is prescribed by regulations namely the Personal Insolvency Act 2012 (Prescribed Financial Statement) Regulations 2014 (S.I. Number 259 of 2014). In addition to drawing attention to the comment on p. 6 (quoted in para. 26 above) Mr. Farry noted that the section of the PFS which deals with the Co. Clare property is headed “investment property”. As I understand it, Mr. Farry was suggesting that this is a standard heading in the PFS and the debtor here was simply trying to bring himself within the requirements of the standard forms. It should be noted that p. 5 of the PFS in this case mirrors Part 1 of the Assets section of the PFS standard form while p. 6 (albeit with the addition of the words “2nd PPR”) mirrors Part 2 of the same section of the prescribed standard form PFS.
35. Considerable emphasis was placed by Mr. Farry on what is said by the debtor in his affidavit, (As quoted in para. 8 above). He reiterated that this is the only sworn evidence dealing with where the debtor ordinarily resides (which is the relevant test for present purposes).
36. Mr. Farry also highlighted the terms of the Notice of Objection filed on behalf of Pentire which clearly signal that Pentire regards the Smithfield apartment as the principal private residence of the debtor. In s. 6 of that Notice, Pentire complains that, while the bank debt secured on the Co. Clare property would be repaid in full under the PIA, the debt to Pentire: –
“Which is secured on the debtor’sprincipal private residence at Apartment 47 Smithfield…would be significantly written down” (emphasis added).
37. In addition, s. 9 of the same Notice states that in the submission made by Pentire in accordance with ss. 98(1) and 102(1) of the 2012 Act, a payment schedule in respect of the Pentire debt was not only affordable to the debtor, but “would not have required him to dispose of any an interest in or cease to occupy his principal private residence…”Mr. Farry said that this again was a reference to the Smithfield apartment.
38. Mr. Farry submitted that the creditors of the debtor were not misled by the terms of the PIA and this is very clearly illustrated by the terms of Pentire’s Notice of Objection (as set out above). Its Notice of Objection shows that, notwithstanding what was said in the PIA (where the Co. Clare property was described as the debtor’s principal private residence) Pentire very clearly understood that, in truth, the principal private residence of the debtor within the meaning of the 2012 Act is the Smithfield apartment.
39. With regard to the PIA Mr. Farry submitted that this is a document that is drafted by the personal insolvency practitioner. Mr. Farry drew attention to the provisions of s. 104(1) of the Act of 2012, which contemplate that it is the personal insolvency practitioner who will formulate the proposal for a PIA.
40. With regard to the identification in the PIA of the Co. Clare property as the principal private residence of the debtor, Mr. Farry said that it has to be borne in mind that this is an interlocking application linked with the application currently pending in the Circuit Court in respect of the debtor’s partner, Ms. Una Kennedy. As noted elsewhere in this judgment, there appears to be no doubt but that the Co. Clare property is the Principal Private Residence of Ms. Kennedy.
41. Mr. Farry, understandably, placed most emphasis upon the affidavit sworn by the debtor (as described above). Mr. Farry submitted that the court does not need to go beyond the affidavit. Mr. Farry submitted that the definition of a principal private residence in s. 2 of the 2012 Act is a matter of substance which requires a debtor, for the purposes of s. 115A, to prove where he or she ordinarily resides.
42. Mr. Farry also submitted that s. 120 of the 2012 Act limits the grounds on which a PIA may be challenged by the creditor and that it will be for the bank in due course to prove these grounds at the substantive hearing of the application brought by the personal insolvency practitioner in this case on behalf of the debtor. At a later point in this judgment I deal in more detail with s. 120.
Further submissions of the parties
43. In reply, Mr. Dunleavy, suggested that Mr. Farry had misunderstood the position of the bank. As noted above, Mr.Dunleavy said that the bank is not suggesting that the court should engage in an inquiry as to where the principal private residence of the debtor is located. Instead, Mr. Dunleavy reiterated that the court must look at the application brought under s. 115A through the lens of the PIA in which the Co. Clare property is clearly identified as the debtor’s principal private residence. The case made by the bank is that, in those circumstances, the only property that can be treated as the principal private residence of the debtor for the purposes of the application to confirm the PIA is the Co. Clare property identified as the only such residence in the PIA.
44. With regard to Mr. Farry’s submission that it was the responsibility of the personal insolvency practitioner to formulate the PIA, Mr. Dunleavy drew my attention to the provisions of s. 99(1) of the Act of 2012, which expressly requires that the terms of a PIA “shall be those which are agreed to by the debtor…”. Mr. Dunleavy suggested that in the circumstances the debtor takes “completed ownership” of what is contained in the PIA. He suggested that this is reinforced by the provisions of s. 106(1) which provides that the creditors’ meeting to consider the PIA will not be called unless the debtor has consented to the proposal for a PIA prepared by the personal insolvency practitioner. Thus, in the present case, Mr. Dunleavy said that the debtor had consented to the PIA being put forward to his creditors on the basis that the Co. Clare property is his principal private residence. Mr. Dunleavy suggested that this was conceded in the written submissions delivered on behalf of the personal insolvency practitioner at an earlier stage of these proceedings (prior to the determination of the issue described above by Baker J.). In para. 25, of those submissions, it was stated that: –
“The PIA is the debtor’s proposal”.
45. Mr. Dunleavy concluded his submissions by suggesting that the debtor cannot, by swearing an affidavit for the purposes of the hearing under s. 115A, get around his previous nomination of the Co. Clare property as his principal private residence in the PIA.
46. One further submission by Mr. Farry should be noted. He suggested that Mr. Dunleavy could not be correct insofar as he submitted that extraneous evidence could not be relied upon in an application under s. 115A. Mr. Farry said that in any application under s. 115A, there are many matters which will require to be proved in the ordinary course. Thus, there will always be evidence from the personal insolvency practitioner proving such matters as:-
(a) The holding of the creditors’ meeting;
(b) Proof that the s. 115A application was launched within 14 days after the creditors’ meeting;
(c) Proof of service on all relevant parties;
(d) Proof that there is a class of creditors, at least 50% of which supported the arrangement;
(e) Proof of the outcome of the voting at the creditors’ meeting.
47. Mr. Farry therefore, suggested that proof of the place where the debtor ordinarily resides is just one of several matters that falls to be proven in applications of this kind.
Discussion
48. I am very grateful to counsel for the very clear and comprehensive way in which they have argued the matter on both sides. In circumstances where the bank is not asking the court to make a determination as to the true location of the debtor’s principal private residence, the issue which I have to resolve on this application boils down to whether the debtor is entitled to put forward on the hearing of the s. 115A application a different property as his principal private residence to that set out in the PIA. In other words, is the debtor bound for the purposes of the s. 115A application by what has been said in the PIA as to the identity of his principal private residence.
49. In considering this question, I do not believe that I can take the view that the debtor has no responsibility for the formulation of the PIA. While s. 98(1) of the 2012 Act contemplates that the proposal for a PIA will be prepared by the personal insolvency practitioner. Sections 99(1) and 106(1) very clearly demonstrate that the terms of the PIA have to be agreed with the debtor.
50. One of the puzzling features of this case is the discrepancy between the terms of the PFS and the PIA. While p. 6 of the PFS suggests that the Co. Clare property is a “2nd PPR”, it is quite clear from a consideration of the PFS as a whole that the Smithfield apartment is, in fact, identified as the principal private residence of the debtor. This is reinforced, for example, by the detailed information given in relation to the debt secured on the principal private residence on p. 12 of the PFS. There, all of the information very clearly relates to the Pentire liability and the Smithfield apartment. When it comes to deal with the Bank of Ireland debt secured on the Co. Clare property at p. 14 of the PFS, no suggestion is made that this liability is secured on the principal private residence of the debtor.
51. In light of the terms of the PFS, I find it very difficult to understand why a different property was identified as the debtor’s principal private residence in the PIA. This has not been explained at this stage, although I note from the submissions made by Mr. Farry on behalf of the personal insolvency practitioner, that it is intended to furnish further affidavit evidence in advance of the substantive hearing of the application under s. 115A. I also note the suggestion made by Mr. Farry in the course of his submissions that the identification of the Co. Clare property as the debtor’s principal private residence in the PIA may have arisen as a consequence of the fact that the PIA was prepared in the context not merely of these proceedings in the High Court but also the interlocking proceedings in the Circuit Court in respect of the debtor’s partner Ms. Una Kennedy. There appears to be no doubt but that the Co. Clare property is her principal private residence. However, in circumstances where that has not been dealt with on affidavit, there is no evidence before the court that this is the explanation for the difference between the way in which the principal private residence is dealt with in the PFS on the one hand and the PIA on the other.
52. It is particularly difficult to understand the discrepancy between the PFS and the PIA in circumstances where, as counsel for the bank correctly submitted, the architecture of the 2012 Act envisages that the PFS will form the basis on which the PIA is put forward. As noted in para. 17 above, there is a statutory obligation imposed on the debtor to make a full and honest disclosure of his financial affairs to ensure that to the best of his knowledge the PFS is true, accurate and complete. This obligation is stressed by counsel for the bank. However, nothing has in fact been submitted to me which would show that the debtor is in breach of this obligation insofar as the PFS is concerned. On the contrary, if it be the case that the Smithfield apartment is the principal private residence of the debtor, then the PFS (insofar as it relates to the identity of his principal private residence) appears to be substantially correct. I appreciate that it also refers to the Co. Clare property as the debtor’s “2nd PPR” but both the structure of the PFS and the overall content of the PFS appear to me to point to the Smithfield apartment as the principal private residence of the debtor.
53. The link between the PFS and the PIA is to be found in the provisions of s. 54. As recorded in para. 20 above, under s. 54, the personal insolvency practitioner – on receipt of an instruction from the debtor under s. 53 to proceed with a proposal for a PIA – is obliged to complete a statement confirming (inter alia) that the practitioner is of opinion that the information contained in the PFS is complete and accurate. In that way, the Act very clearly envisages that the PFS will form the basis for moving forward with a PIA. One would therefore expect that the terms of the PIA should reflect what was said in the PFS and be consistent with the PFS.
54. The identification in the PIA of the Co. Clare property as the principal private residence of the debtor is all the more puzzling when one considers the terms of the debtor’s affidavit sworn on 21 November 2017. While I have not been asked to make a determination at this stage as to where the debtor’s principal private residence can be said to be, the evidence in that affidavit (if admissible) tends to support the view that the information given on pp. 5 and 12 of the PFS (to the effect that the Smithfield apartment is his principal private residence) is, in fact, correct. On the face of it, it is therefore very surprising that the PIA identifies the Co. Clare property as the principal private residence of the debtor.
55. I am in no position to form a view as to how the discrepancy between the PIA and the PFS arose. That is not something which is explained anywhere on affidavit. For the purposes of this application, I must proceed on the basis that the discrepancy exists. I must also proceed on the basis that on the face of the PIA, it is the Co. Clare property that is clearly identified as the principal private residence of the debtor.
56. In this context, it is important to consider the effect of a PIA. As discussed in the submissions of counsel, the proposal for the PIA is voted on by the creditors at the creditors’ meeting. That is clear from s. 109(1). There is an opportunity under s. 109(3) to modify the proposal before the vote for the purposes of addressing an ambiguity or rectifying an error. That obviously did not occur in the present case. Instead, the creditors were asked to consider and vote on the proposal which is embodied in the PIA and which identifies the Co. Clare property as the principal private residence of the debtor.
57. It is instructive to consider what happens thereafter where a PIA is confirmed by the court. In the case of its confirmation under s. 115A, the PIA will be registered with the Insolvency Service. If a PIA is registered by the Insolvency Service, it takes effect according to its terms. Essentially, the terms become legally binding. This is reinforced by the provisions of s. 117(1) which expressly provides that the PIA:-
“shall operate according to its terms and the debtor and creditors concerned shall perform their obligations in accordance with the Arrangement”.
58. In addition, it is also necessary, in my view, to bear in mind that under s. 118(1) of the 2012 Act, a specific obligation is imposed on a debtor who participates in any process under Chapter 4 (which deals with PIA) to (a) act in good faith and (b) to make full disclosure to the personal insolvency practitioner of (inter alia) all of his or her assets, income and liabilities. It seems to me that this obligation to act in good faith extends to all steps involving the debtor under Chapter 4 of the 2012 Act. This obligation would accordingly extend to the requirement under s. 99(1) and s. 106(1) to agree the terms of the PIA and to consent to the proposal for the PIA being put before the meeting of creditors.
59. Having regard to the statutory provisions described in paras. 57 to 58 above, a significant question arises in this case as to whether the debtor – subsequent to the meeting of creditors, after he had previously agreed the terms of the proposal for the PIA, and in circumstances where no attempt was made to modify those terms pursuant to the provisions of s. 109(3) – can be said to be entitled to thereafter nominate a different property as his principal private residence to that described in the PIA. As noted in para. 57 above, the Act clearly envisages that the PIA is intended to take effect in accordance with its terms. Equally, the debtor is required to act in good faith. The question therefore arises how, in an application under s. 115A, the debtor can seek to suggest that in fact his principal private residence is different to that described in the PIA.
60. In other words, a question arises as to whether a court can properly approve a PIA, in circumstances where one of the details of the PIA is apparently incorrect and where, once registered with the Insolvency Service, the PIA (incorporating details which are known to be incorrect) will take effect in accordance with its terms pursuant to s. 117(1). At this point, I should make it clear, that I do not know (and have not been asked to make a finding) that the location of the debtor’s principal private residence as given in the PIA is in fact incorrect. However, on the basis of the affidavit evidence of the debtor, the address given in the PIA may well be incorrect. If so, a similarly troublesome question arises as to how a court, on an application under s. 115A, can be satisfied that a debtor has acted in good faith where the PIA is known to be incorrect (again assuming that the information in the PIA is incorrect).
61. Before attempting to address those questions (to the extent that it is appropriate to do so in advance of any substantive hearing), it seems to me that the provisions of ss. 120 and 122 may potentially be relevant and should be considered. Section 120 of the 2012 Act, sets out the grounds on which a PIA may be challenged by a creditor. For the purposes of this issue, it is not necessary to consider all of the grounds. The potentially relevant ground for present purposes is that contained in s. 120(c) which is in the following terms: –
“(c) a material inaccuracy or omission exists in the debtor’s statement of affairs (based on the Prescribed Financial Statement) which causes a material detriment to the creditor”
62. This very clearly suggests that if no material detriment is caused to the creditor, a material inaccuracy or omission in a debtor’s statement of affairs based on the PFS will not be a ground of challenge. The provision therefore appears to envisage that there may be material inaccuracies in a statement of affairs which would not give rise to a ground of challenge. The language of s. 120(c) is echoed in the provisions of s. 122 of the 2012 Act which deal with circumstances where, after a PIA takes effect, a creditor (or the personal insolvency practitioner) may apply to the court to have the PIA terminated. One of the grounds on which such an application can be made is that set out in s. 122(1)(a) which is in identical terms to s. 120(c). Again this suggests that a material inaccuracy in a debtor’s statement of affairs which does not cause detriment to a creditor was not regarded by the legislature as sufficient to give a creditor a basis to attack a PIA.
63. Of course, neither ss. 120(c) nor s. 122(1)(a) are directly applicable in the case of an inaccuracy in a PIA other than where the inaccuracy is contained in the statement of affairs (which will, as in this case, be annexed in an appendix to the PIA). There is in fact no provision in the 2012 Act which provides a mechanism, after proposals for a PIA have been voted upon, to deal with errors or inaccuracies contained in the PIA. In my limited experience as a judge dealing with personal insolvency matters, the only practical way of dealing with an inconsequential error or inaccuracy which is identified in a PIA, is to note, in the order confirming the PIA, that the inaccuracy exists and to set out the correct position in the order. So far, the only inaccuracies which I have encountered are ones which are truly inconsequential and which do not affect the payment terms or the other operative provisions set out in Part IV of the PIA form.
64. Nonetheless, although ss. 120 and 122 are not concerned with inaccuracies in a PIA (as such) it is significant that the legislature was only concerned to provide a remedy to a creditor in respect of material inaccuracies or omissions which give rise to a material detriment. It is clear from ss. 120 and 121 that, in the case of inaccuracies in a statement of affairs (based on the PFS), the legislature does not regard inaccuracies as giving rise to a remedy unless they are material and unless detriment can be shown. In this context, it is important to bear in mind that, as Mr. Dunleavy acknowledged, the PFS is intended to be the foundation on which the PIA is built. It would seem to me to be extraordinary that an inaccuracy (which does not give rise to detriment) in such an important document as a statement of affairs could be forgiven, but that an inaccuracy in other parts of the PIA would be incapable of exoneration even where no detriment is suffered by anyone.
65. I must, however, bear in mind that, notwithstanding the importance of the PFS (or a statement of affairs based upon it), the PIA has the binding status outlined in para. 57 once it has been voted on by the creditors, approved by the court and registered with the Insolvency Service. I must also bear in mind that a PIA once voted on by the creditors, is not capable of amendment. In these circumstances, great care should be taken by those involved in the preparation of a PIA to ensure that it is accurate in all respects.
66. Moreover, if a creditor has voted in favour of arrangement in a particular form and organised its affairs on that basis, it would be difficult to see any circumstance in which the debtor could thereafter seek to suggest that, in respect of such a creditor, he or she is not bound by the way in which the material terms of the arrangement have been expressed. Thus, in cases where creditors have accepted the PIA by voting in favour of the proposals contained in the PIA, it may be difficult for a debtor, at the subsequent hearing to confirm the PIA, to resile from the express terms of that arrangement (at least in so far as they are material) or even to suggest that there is an error in any of its material terms.
67. Nonetheless, I am of opinion that there is a significant difference between the scenario described in para. 66 above, and the present case. In the first place, the bank has not signed up to the proposal. It is true that the bank voted on the proposal but, crucially, the bank never accepted the proposal. On the contrary, it voted against the proposal. There is in fact nothing in the evidence before the court which suggests that the bank would have voted in favour of these proposals even if a different location had been given as the debtor’s principal private residence. To judge from its notice of objection, its opposition to the proposal is based largely on the grounds that its interests are impaired by the proposal and that the terms of the arrangement are unfair and inequitable and unfairly prejudicial to it.
68. Secondly, it is open to question that the description of the principal private residence in the PIA is in fact material to the operative provisions of the PIA. In this context, I must bear in mind that, notwithstanding the centrality of the principal private residence in the context of the rationale for the proposals for a PIA under the 2012 Act, the description of the PIA (at least in the present case) does not in fact affect the payment proposals or any of the other substantive proposals which are contained in the PIA. On the contrary, it seems to me that the payment proposals and all of the other operative parts of Part IV of the PIA can still be operated in this case even if it transpires that the principal private residence of the debtor is incorrectly stated in the PIA.
69. It is important in my view to have regard to the structure and the terms of the PIA. The PIA is in the standard form. It contains in Part I an executive summary. This is where the Co. Clare property is very plainly identified as the debtor’s principal private residence. Part II contains the definitions which will be used in the PIA. Part III provides information in relation to the “debtor background, reasonable living expenses and confirmations”. This section opens with the words: –
“The Debtor Donal Taaffe, of Apartment 47, Block E, Smithfield Market, Dublin 7 . . .”
Part III also sets out the claimed advantages of the arrangement and the debtor’s living expenses. It also contains a number of important confirmations and warranties on the part of the debtor. However, it is in Part IV that the PIA spells out the specific terms of the arrangement under which payments will be made to the creditors. This section refers to and effectively incorporates a number of appendices. For example, Appendix 3 contains a schedule of creditors including the secured creditors and unsecured creditors and also the preferential creditors. Appendix 4 is especially important. It sets out the estimated dividends to creditors. Appendix 5 sets out a comparison of the estimated outcome under the proposed arrangement as against the outcome in the event of a bankruptcy of the debtor and of his partner, Ms. Kennedy. Appendix 6 sets out the estimated voting rights to be accorded to creditors at the meeting to vote on the proposals. Appendix 7.1 deals with the proposed restructure of the Ballyhannon mortgage loan. Appendix 7.2 deals with the proposed mortgage restructure of the mortgage in respect of Apartment 47, Smithfield Market. For completeness, it should be noted that each of the bank and Pentire are unhappy with the terms proposed in Appendix 7 and their objections will fall to be considered at the substantive hearing of the s. 115A application.
70. It is thus in Part IV of the PIA and the appendices described above that the creditors find the terms on which it is proposed the debts due to them will be dealt with. Of course, some of the other terms of the PIA (including the confirmations and warranties given by the debtor in Part III) are also very important. So, too are the standard terms set out in Part V of the PIA. The creditors will wish to rely on these standard terms and on the warranties and confirmations. However, it is in Part IV and the attached appendices that one finds the “meat” of the proposal.
71. Crucially, it seems to me that these terms are all capable of being performed and enforced even if it transpires that the location of the principal private residence of the debtor has been incorrectly described in the executive summary. In fact, the terms would all be capable of being applied and enforced whether the executive summary had described the principal private residence as the Smithfield apartment or the Co. Clare property. While, as a matter of law, the identity of the principal private residence is critical to the potential application of s. 115A, it does not appear to me to be critical to the operation of the arrangement contained within the PIA. In my view that arrangement would be capable of taking effect and would be legally enforceable (if confirmed by the court under s. 115A) irrespective of the identification of the Co. Clare property as the principal private residence of the debtor. In this context, I do not see anything in ss. 99 or 104 that would cause me to alter this view. S. 99 sets out in detail the mandatory requirements concerning PIAs but does not make any provision that the address of the principal private residence must be stated either accurately or at all. S. 104 is the statutory provision which places the principal private residence at the centre of the PIA process but, again, it contains no specific provision requiring that the PIA should record its address in any particular way. Nor does it contain any provision which suggests that any adverse consequences should flow from a failure to correctly identify the address.
72. However, it is clear that court confirmation could not be forthcoming unless the court can be satisfied that some property other than the Co. Clare property constitutes the principal private residence of the debtor. This is for the simple reason that there is no relevant debt within the meaning of s. 115A in respect of the Co. Clare property, such that this particular gateway requirement could not be satisfied.
73. That brings me to the question of how the gateway relevant debt requirement should be addressed on a s. 115A application. In this context, it seems to me that, for the purposes of any contested application under s. 115A, neither the court nor the objecting creditors can be bound by the description of the principal private residence given in the PIA. In my view, given the critical importance of the “relevant debt” requirement in the context of s. 115A, the relevant factual constituents of the “relevant debt” would require to be proved by appropriate evidence at the hearing under s. 115A.
74. Furthermore, it seems to me that, having regard to the debtor’s obligation of good faith, the debtor would be required to disclose to the court on the hearing of the s. 115A application where, in truth, he or she ordinarily resides even if this is different to the address given for the principal private residence in the PIA. At the substantive hearing, the court would have to be satisfied by appropriate evidence that there was a relevant debt. Of necessity, this would involve the debtor giving evidence on affidavit as to where he or she ordinarily resides and any objecting creditors who disagreed with the debtor’s evidence as to where he or she ordinarily resides must be entitled to place their own evidence before the court to the contrary. It would then be a matter for the court to make a substantive finding on the issue based on the evidence before it.
75. I therefore believe that in every contested case under s. 115A, the debtor is bound to put evidence on affidavit to deal with the location of his principal private residence. For this purpose, I do not believe that a debtor is necessarily bound by the description of the principal private residence given in the PIA. I do not go so far as to suggest that a debtor will never be so bound. There may be cases where there would be adverse consequences for the debtor if it transpires, at the stage of the s. 115A application, that his or her principal private residence is different to that stated in the PIA. In my view, the debtor and the practitioner must take all appropriate care to ensure that a PIA is accurate in all respects before placing it before the creditors. Thus, for example, if a creditor voted in favour of a proposed PIA on the premise that the property described in the PIA as the debtor’s principal private residence was correctly so described, that creditor may well have a basis to complain if it subsequently transpires that its vote was procured on a mistaken premise.
76. Furthermore, it seems to me that, if the address of the principal private residence given in the debtor’s affidavit is different to that stated in the PIA, this is a matter which will have to be very fully explained on affidavit by the debtor concerned. To the extent that the discrepancy arises as a result of the input from the personal insolvency practitioner, then the practitioner would also have to provide an explanation on affidavit. It would then be a matter for the court to consider the evidence and to determine the appropriate course to take in any individual case..
77. In addition, as stated in para. 73 above, the objecting creditors must equally be entitled to adduce their own evidence on the true location of the principal private residence of the debtor and to challenge the evidence of the debtor including any of the evidence explaining the discrepancy.
Decision
78. In the present case, for the reasons outlined above, I am of the view that the PIA is capable of taking effect even if the court ultimately determines that the Smithfield apartment is the principal private residence of the debtor. However, this is subject to a number of contingencies.
79. In the first place, it is dependent upon the evidence to be adduced. As noted above, the bank will be free to furnish its own evidence on this issue.
80. Secondly, in light of the discrepancy between the debtor’s affidavit and the PIA as to the correct identity of his principal private residence, it will be necessary for the debtor – and possibly also the personal insolvency practitioner – to place evidence before the court explaining how this discrepancy arose. The discrepancy has the potential to call into question whether the debtor is in breach of his good faith obligation. As stated in paragraph 76 above, the court will therefore require that the debtor should fully explain on affidavit how the inconsistency between the PIA and his current evidence came about. In due course, at the substantive s.115A hearing, the court will have to consider that evidence and will hear submissions from both sides as to whether there has been a breach of any good faith obligation and, if so, what are the consequences that potentially flow from any such breach. If there is a basis to suggest that there has been a breach of such an obligation, it may be necessary to debate whether this is a factor that can or should be taken into account by the court in the exercise of its powers – and any discretion it may be said to have – under s.115A.
81. Thirdly, the bank will be free, should it wish to do so, to place its own evidence before the court as to the true location of the debtor’s principal private residence and as to whether any prejudice arises to it as a consequence of the inconsistency between the PIA and the debtor’s affidavit or as a consequence of the fact that the PIA (if confirmed by the court) will continue to show the Co. Clare property as the principal private residence of the debtor. While I cannot at present see how any material prejudice could arise for the bank, I do not believe that it would be appropriate to shut out the bank from making such a case if there is, in truth, a basis for it. If the bank wishes to make a such a case, it seems to me that it would be necessary for the bank to address how any prejudice could be said to arise in circumstances where it has at all times opposed the terms set out in the PIA.
82. If ultimately, the court is persuaded to confirm the PIA, it seems to me that the misdescription of the principal private residence of the debtor in the PIA (if the court determines that it had been misdescribed) should be dealt with by an appropriate recital or note in the order.
83. In the meantime, I do not believe that any finding could properly be made at this stage of the proceedings that the debtor is bound by the description of his principal private residence as set out in the PIA. Any such issue will fall to be considered at the substantive hearing on the basis of the evidence and submissions of the parties in relation to the matters outlined in paras. 79-81 above. At this point, it would be premature to make any determination on this issue. All that can be said at this stage is that, for the reasons outlined above, I do not believe that the debtor is ipso facto bound by the description given in the PIA.
Denis McDonald
Re: Featherson (Personal Insolvency)
[2018] IEHC 683 (05 December 2018)
JUDGMENT of Mr. Justice Denis McDonald delivered on the 3rd day of December, 2018.
Introduction
1. This is an appeal brought by Daniel Rule, Personal Insolvency Practitioner (“the practitioner”) on behalf of the above named debtor from the decision of His Honour Judge Enright in the Circuit Court of 24 July 2018 by which the learned Circuit Court Judge refused an application brought under s. 115 A of the Personal Insolvency Act 2012 (the 2012 Act) (as amended by s. 21 of the Personal Insolvency (Amendment) Act 2015) seeking an order confirming the coming into effect of a proposed Personal Insolvency Arrangement (“PIA”) notwithstanding that it had been rejected at a meeting of the creditors of the debtor held on 21 September 2017.
2. At the hearing of the appeal, I was informed by counsel for the practitioner that the principal reason why the learned Circuit Court Judge refused the application under s. 115A was the poor payment history (as described below) of the debtor in the period prior to the issue of the protective certificate which, in this case, was issued on 14 July 2017. Under s. 115A(10)(a) of the 2012 Act, the court is required to have regard to the conduct of the debtor in seeking to pay debts within a two-year period prior to the issue of the protective certificate.
The proposed PIA
3. The debtor in this case is a self-employed builder. He lives in an apartment at Ballyboden, Dublin 16. Between July 2016 and March 2018 he was employed on a contracts basis by a civil engineering company and was due to be paid €750 gross per week. However, he says that these payments were intermittent and that accordingly in March 2018, he stopped working for the civil engineering company and commenced working for himself. According to his evidence, he has a number of building projects underway which vary in price from €67,000 to €113,000 with estimated profits varying from €16,000 to €35,000.
4. The current market value of his apartment is €265,000. However, there is a debt due to AIB Mortgage Bank (“the bank”) of €511,763.39 secured on this property. In addition, the debtor owes money to AIB Leasing Ltd., Allied Irish Banks plc. and the Revenue Commissioners. In this case, there is a preferential debt owed to the Revenue Commissioners of €18,987. Although the debts to the Revenue Commissioners are “excludable debts” it should be noted that the Revenue Commissioners have participated in the PIA process and that they voted in favour of the proposed PIA. In fact, it is their vote in favour of the PIA that is relied upon for the purposes of s. 115A(9)(g) of the 2012 Act under which, on an application for an order under s. 115A, the court must be satisfied that the proposal has been accepted by at least one class of creditors. In the application before the Circuit Court, the Revenue Commissioners were characterised as the “excludable debt class of creditors”. Although this was initially disputed by the bank, no argument was addressed to that issue on the hearing of this appeal and it appears to be tacitly accepted that the Revenue Commissioners are a separate class for the purposes of the proposed PIA. I am satisfied that they do constitute a separate class.
5. Under the proposed PIA, the secured indebtedness to the bank will be reduced to €291,500 (which is somewhat greater than the market value of the apartment). The balance of €220,263 will be treated as an unsecured debt and will rank with all other unsecured debts (other than the preferential debt to the Revenue Commissioners) for payment of a dividend which is estimated to be 3c per euro. In the case of the preferential debt due to the Revenue Commissioners in the sum of €18,987, this will be paid in full in accordance with s. 101 of the 2012 Act (which makes clear that preferential debts are to be paid in priority).
6. During the currency of the proposed PIA (which will last for the maximum permitted period of 72 months), the estimated monthly payment to the bank will be €1,126.86 (based on an interest rate of 2.25% over the ECB rate). This compares to payments of €2,696.18 which are currently due per month (based on a margin of 3.81% over the ECB rate which was agreed by the debtor at the commencement of the mortgage). Subsequent to the expiry of the PIA, it is proposed that the interest rate would revert to 3.81% over the ECB rate and that the estimated monthly contractual repayment would be of the order of €1,334.18.
7. According to Appendix 4 to the PIA, the anticipated self-employed income of the debtor will be €3,024 per month for the 72 month duration of the PIA. After deduction of amounts due in respect of reasonable living expenses, mortgage repayments and other expenses including the fees payable to the practitioner, it is envisaged that there will be net funds available of €1,369 per month in the first year and €5,068 per month in the second and subsequent years which will be used in the first instance to discharge the preferential debt to the Revenue Commissioners and which, over years 5 and 6 will see the 3% dividend paid to the unsecured creditors (including the amount due to the bank over and above the figure of €291,000 mentioned above). Under Clause 12 of the standard terms of the PIA (as set out in Part V), the debtor will be required to account for any increase in his income above the amount specified in Appendix 4. If that additional income exceeds €100 per month, 50% of the additional income will have to be made available to the practitioner for distribution to the unsecured creditors by way of an increase to the 3% dividend.
The present application
8. At the meeting of creditors which took place on 21 September 2017, the Revenue Commissioners (representing 7.11% of the unsecured debt) voted in favour of the proposal. 92.89% (predominantly made up of the bank debts) voted against the proposal. However, in circumstances where the Revenue Commissioners have (correctly) been treated as a separate class for the purposes of s. 115A, it was open to the practitioner on behalf of the debtor to make an application to the Circuit Court to confirm the coming into effect of the proposed PIA notwithstanding the outcome of the vote at the creditors meeting. Accordingly, having been so instructed by the debtor, the practitioner filed a notice of motion seeking relief under s. 115A on 27 September 2017. In turn, the bank filed a notice of objection in which a large number of issues were canvassed. However, in the course of the hearing before me, it was made clear by counsel for the bank that it was confining its objection to three points: –
(a) In the first place, it was submitted that the payment history (addressed in more detail below) was such as to persuade a court to refuse relief under s. 115 A;
(b) Secondly, it was contended that the payment history was such as to call into question the bona fides of the debtor;
(c) Thirdly, it was suggested that the means of the debtor (in particular in the period following the expiry of the PIA) showed that the debtor could pay more to the bank than is provided for under the PIA.
The arguments of the parties
9. Counsel for the bank very properly accepted that a poor payment history is not an absolute bar to the grant of relief under s. 115A. He accepted that there well may be circumstances where a debtor will be in a position to explain why payments were not made. However, he stressed that the payment history of a debtor in the two year period prior to the grant of a protective certificate was a matter to which the court must have regard, particularly in circumstances where the court, on an application under s. 115A, is asked to grant very far reaching relief. Counsel submitted that it was incumbent on a debtor, invoking the s. 115A jurisdiction, to fully explain any poor payment record during the relevant two-year period. he also suggested that quite apart from that two year period, the debtor owed an obligation to explain any non-payment during the protection period itself.
10. Counsel for the practitioner accepted that, on an application under s. 115A, the court must look at the payment record of the debtor. However, he submitted that, in contrast to the requirements set out in s. 115A(9) the court, under s. 115A(10) retained a discretion to approve the coming into effect of the PIA even where the payment record of a debtor within the relevant two year period was poor. He also stressed that in this case, the bank had not raised this issue as one of its grounds of objection in the notice of objection described above. He said it was very significant that it was only raised in the affidavits filed on behalf of the bank. He also drew attention to the fact that it had not been an issue which featured at all in the correspondence which had taken place (largely by email) between the practitioner and the bank during the currency of the protection period. Counsel also stressed that, in this case, the bank had made a counterproposal to the practitioner (after the creditors meeting) which he suggested showed very clearly that the bank was not in fact concerned about payment history and that the bank envisaged that the bank could, in fact, do business with the debtor.
11. Counsel for the practitioner rejected the suggestion that the payment history during the currency of the protection period was relevant to an application under s. 115A. In the first place, he stressed that it is not addressed in the text of s. 115A. Quite apart from that consideration, counsel suggested that payments made during the protection period may operate almost as a preference in favour of a secured creditor, particularly in circumstances where the secured debt greatly exceeded the value of the underlying security.
12. With regard to the argument as to affordability, counsel for the practitioner argued that the submission made on behalf of the bank was based on a mistaken premise. Counsel argued that while the means of the debtor were vitally important in considering the reasonableness of proposals during the currency of a PIA, they were not relevant when it came to the post-PIA period.
Discussion and analysis
13. Before turning to the three issues raised by the bank, it is important to consider the role of the court in a s.115A application. In Michael Ennis [2017] IEHC 120 at para. 39, Baker J. described s.115A in the following terms: –
“Section 115A . . . gives the court a far reaching power to overrule the result of a vote at a creditors’ meeting if the court is satisfied that a debtor may, as a result of the proposals contained on a PIA, continue to reside in, and/or not be required to dispose of an interest in, his or her principal private residence. The court must be satisfied before engaging its jurisdiction under s. 115A that the proposal is not unfairly prejudicial to the relevant creditor.”
14. Baker J. in the same judgment made clear that the court, in the exercise of its statutory powers must consider the fairness of the proposed PIA. In considering that question of fairness, Baker J. made clear that the principal yardstick by which to assess fairness is to compare the outcome for a creditor under a PIA against the likely outcome in the event of the bankruptcy of the debtor.
15. Usually, an objecting creditor will argue that the proposed PIA is unfairly prejudicial to it. That has not been the focus of the argument in the present case. While the question of fairness is directly relevant to the third of the points raised by counsel for the bank, it is not directly in play insofar as the first two points raised on behalf of the bank are concerned. Nonetheless, fairness must always be a fundamental consideration in any application under s. 115A.
16. I now consider, in turn, the three issues which were argued before me.
The payment record of the debtor prior to the issue of the protective certificate
17. In an application under s. 115A, there are certain matters of which the court must be satisfied before the court can consider granting relief. These factors are set out in s. 115A(8) and (9). These are not the only factors that should be taken into account but they are expressly made mandatory requirements by s. 115A.
18. In contrast, s. 115A(10) sets out certain matters to which a court must have regard in considering whether to make an order confirming the coming into effect of a proposed PIA. These include the matters set out in s. 115A(10) namely: –
(a) The conduct of the debtor (within a two year period prior to the issue of the protective certificate) in seeking to pay the debts concerned; and
(b) The conduct within the same period of a creditor in seeking to recover the debts due to the creditor.
19. In my view, it is very important to bear in mind that while the court must have regard to the matters set out in s. 115A(10) the court is not required to dismiss an application under s. 115A where the payment record of a debtor is poor. On the contrary, the court is entitled to make an order confirming the coming into effect of the proposed PIA in such circumstances. That seems to me to be clear from the structure and language of s. 115A. As I have indicated, there is a marked distinction between the approach taken by the legislature in s. 115A(8) and (9) and the approach taken in s. 115A(10).
20. That is not to say that a court should lightly excuse a debtor who has failed to make any serious attempt to repay a debt in the two year period prior to the issue of the protective certificate. The legislature has very clearly indicated that the debtor’s payment record is a factor which must be considered.
21. In cases where a debtor has demonstrated a contempt for his or her payment obligations, this factor would, in my view, weigh against the grant of relief under s. 115A. On the other hand, the debtor’s circumstances may well be such that it is evident that the debtor was simply unable during that period to make any significant payments in discharge of his debts.
22. In each case, everything will depend upon the evidence placed before the court. In this context, I fully agree with the submission made by counsel for the bank that it is incumbent upon the debtor to explain why debts were left unpaid. A poor payment record requires to be adequately and comprehensively addressed by a debtor. If it has not been appropriately addressed in the evidence of the debtor, the court may well take the view that it is appropriate to dismiss the application under s. 115A. However, it would be wrong to suggest that this must happen in every case. The evidence before the court must be assessed in the round. All relevant circumstances must be taken into account. Even in cases where the explanation provided by the debtor may appear, at first sight, to be unsatisfactory, there may be sufficient material before the court to suggest that the court’s discretion should be exercised in favour of the debtor.
23. In addition, as s. 115A(10)(a) makes clear, the approach taken by the creditor in the same two-year period (insofar as steps taken to recover the debt are concerned) must also be taken into account. There may well be cases where a creditor has been prepared to step back and not to pursue a debtor in that two year period. This may operate as a countervailing factor in any consideration of the issues that arise under s. 115A(10).
24. It must also be borne in mind that s. 115A is not capable of being operated unless there was a relevant default on the part of the debtor. S. 115A(18) makes this very clear. One must bear in mind that s. 115A cannot apply unless the debts covered by a proposed PIA include a “relevant debt”. For this purpose, s. 115A(18) defines a ” relevant debt ” as a debt (secured over the principal private residence of the debtor) which was in arrears on 1 January 2015 or in respect of which (before 1 January 2015) the debtor had been in arrears but had entered into an alternative repayment arrangement.
25. The underlying purpose of the Act must also be borne in mind. As the long title to the 2012 Act makes clear, the Act was enacted in the interests of the common good with the objective ( inter alia ) to ameliorate the difficulties experienced by debtors and to enable insolvent debtors to resolve their indebtedness in an orderly and rational manner without recourse to bankruptcy. While there are obvious limits to the extent to which this underlying purpose can be taken into account, there may well be circumstances where a debtor has a poor payment record during the relevant two year period but who, on the evidence before the court, has demonstrated a genuine intention to deal with his or her debts under a PIA which appropriately addresses the payment of the debtor’s liabilities, having regard to his or her means, and which has a real prospect of securing a better outcome for the debtor’s creditors than the likely outcome on a bankruptcy of the debtor. It would be wrong, in my view, for a court to take an unduly ” box-ticking ” approach and to dismiss every application under s. 115A where the debtor has a poor payment record during the relevant two year period. In my view, that is not what s. 115A(10) has in mind.
26. That is not to say that there is not an obligation on the debtor to explain a poor payment record. As I have sought to emphasise above, there can be no doubt that there is such an obligation on the debtor. I do not intend to dilute the significance of that obligation in any way. The practitioner/debtor bears the onus of proof in applications under s. 115A. It is therefore essential that a poor payment record should be appropriately explained on affidavit by the debtor. Nonetheless, even in cases where the explanation may seem unsatisfactory or incomplete, the court retains a discretion if there are countervailing considerations that apply such as to persuade a court that, in all of the circumstances of the case, the s. 115A relief should nevertheless be granted.
The payment record of the debtor
27. Bearing the considerations outlined in paras. 19-26 in mind, I now turn to address the evidence in this case. In her affidavit grounding the objections of the bank, Ms. Christine Mooney has exhibited the statement of account between the debtor and the bank for the period 1 January 2014 to 30 November 2017. It shows that the last payment made by the debtor was a payment of €4,000 made on 9 June 2016. The protective certificate issued on 14 July 2017. In para. 11 of her affidavit, Ms. Mooney highlights that during the 2016 period, the trading position of the debtor had improved. In the year to 31 December 2015, the debtor had made a net profit of €36,929 whereas in the following year, the net profit had increased to €40,953. The 2016 accounts also show that in that year, the debtor had drawings of €51,406.
28. In para. 6 of his affidavit sworn on 3 May 2018, the debtor responds as follows to para. 11 of Ms. Mooney’s affidavit: –
“I have not made payments in a while now as the company for which I was doing work took an extremely long time to make intermittent and sporadic payments. Eventually I could not afford to keep working for nothing so I broke away from them (sic) and started doing smaller jobs with better prospects of payment and I am now in a much better place to start making payments every month”.
29. The debtor also said in para. 11 of the same affidavit that his payments to the bank had “decreased” over the past three years as he ” . . got let down on a few jobs on final payments and could not recover a lot of money owed to me. I say any payments that I did receive had to go immediately paying contractors and suppliers”.
30. In my view, this response from the debtor is entirely inadequate. It does not address in any meaningful way the very particular concern expressed on behalf of the bank in para. 11 of Ms. Mooney’s affidavit. His explanation is wholly lacking in detail. In particular, he does not address the fact that his accounts show profit in the year to 31 December 2016 and significant drawings by him in that year. Yet, the only payment made to him in that year to the bank was a single payment of €4,000. This payment was made at a time when he was contractually required to make monthly payments to the bank in the sum of €2,696.00.
31. A further affidavit was sworn on behalf of the bank by Mr. Tom Walsh on 11 June 2018. Unsurprisingly, Mr. Walsh reiterated the point previously made by Ms. Mooney that the debtor’s payments to the bank had decreased while the trading accounts of the business show an increasing profit trend. This resulted in one further affidavit from the debtor sworn on 26 June 2018. In that affidavit, he explains that between July 2017 and March 2018 he was employed on a contracts basis by a civil engineering company and only received intermittent payments. In para. 12 he says: –
“In fact, payments were intermittent and since March 2018 when I stopped working with them an outstanding sum of €6,500.00 gross remains unpaid. I have pursued them on a weekly basis without success and at this stage may have to resort to legal action to secure payment.”
32. Again, I regret to say that the approach taken by the debtor in his second affidavit is completely lacking in detail. In my view, the debtor has failed to place any sufficient evidence before the court to explain why his payment record was so poor in the period prior to the grant of the protective certificate. I can well understand why, in the circumstances, the learned Circuit Court Judge was minded to refuse the application under s. 115A. To properly explain himself, the debtor should have provided a detailed account on affidavit to the court as to why, notwithstanding his increase in profits, he was unable to make payments to the bank during the period in question. The statement made by him in para. 12 of his second affidavit is very difficult to reconcile with his 2016 accounts. In my view, the failure of the debtor to properly explain himself weighs heavily against the grant of relief under s. 115A. However, as explained above, it does not provide an automatic basis on which the relief under s. 115A should be refused. As I have sought to explain, it must be considered in the round with all of the other evidence before the court. In particular, it seems to me that a number of factors must also be weighed in the balance in this case.
33. In the first place, it is clear from the second affidavit of the debtor that he has a number of building projects underway at the moment. His averments to that effect are corroborated by the material exhibited by him. This shows that the debtor has an ongoing income which, under the terms of the PIA, will be applied for the benefit of his creditors for the duration of the PIA. While I would not wish to suggest that this will always trump a poor payment record in the two year period prior to the issue of a protective certificate, it is nonetheless a factor that must also be weighed in the balance. In my view, the court must bear in mind the purpose of the 2012 Act (as amended in 2015). In this context, I agree with counsel for the practitioner that there is a parallel to be drawn between applications to confirm the coming into effect of a PIA and applications to confirm a scheme of arrangement in examinerships. If there are proposals for a PIA which will achieve the purpose of the 2012 – 2015 Acts, and will result in a better outcome for creditors than a bankruptcy, that is a factor that can be borne in mind even where there has been wrongdoing on the part of the debtor.
34. In this context, the observations of Clarke J. (as he then was) in Re: Traffic Group [2008] 3 IR 253 at p. 261 are apposite: –
“It seems to me, therefore, that a court should lean in favour of approving a scheme where the enterprise . . .and the jobs . . . are likely to be saved. That is not to say that the court should disregard any lack of candour or other wrongful actions. It does, however, seem to me that the court’s approach to such matters should take into account the following.
Firstly, it needs to be recognised that there may be cases where the wrongful actions of those involved in promoting the examinership are so serious that the court is left with no option but, on that ground alone, to decline to confirm a scheme which would otherwise be in order. It is necessary . . . to discourage highly wrongful behaviour.”
Clarke J. went on to say that the need to discourage highly wrongful behaviour must be balanced against the desirability of saving an enterprise rather than see it forced into liquidation. While the parallel is not a perfect one, the approach taken by Clarke J. in that case is nonetheless relevant here because it shows that improper conduct on the part of a party proposing an arrangement is not always fatal.
35. The second factor that I must bear in mind is that there is nothing in the correspondence between the bank and the practitioner which expresses any concern on the part of the bank in relation to the non-payment history prior to the grant of the protective certificate (or indeed in relation to the period after the grant of the certificate). While a significant body of correspondence is exhibited at CM 2 to the affidavit of Ms. Mooney sworn on 11 December 2017, it is striking that nowhere in this correspondence is any concern expressed on behalf of the bank in relation to the debtor’s payment record. If the bank was seriously exercised about the payment record of the debtor prior to the grant of the protective certificate, one would expect that this would be evidenced in contemporaneous material.
36. The third factor that I bear in mind is that, in this case, the bank, while voting against the proposed PIA, made a counterproposal. This is evident from the email from the bank to the practitioner of 11 September 2017 in which the bank proposed a different form of restructuring of the loan facility. This shows very clearly that, notwithstanding the previous payment record of the debtor, the bank considers that an arrangement with the debtor is feasible.
37. I must also bear in mind the position of the other creditors of the debtor. It is clear from Appendix 5 to the proposed PIA that, in the event of a bankruptcy, the unsecured creditors will receive no dividend at all. In contrast, if the PIA in this case is confirmed, the preferential debt of the Revenue Commissioners will be paid in full and the unsecured creditors will receive a very small dividend. While that dividend is tiny, it has the potential to improve in the event that the income of the debtor improves. As noted above, Clause 12 of Part V of the proposed PIA requires the debtor to account for any net increase in his income over the amount specified in Part IV and this will be to the advantage of the unsecured creditors.
38. The remaining factor which I must weigh in the balance is the fact that the Revenue Commissioners here have supported the PIA. This suggests that the Revenue Commissioners are not concerned with the past payment performance of the debtor and that they have confidence that the debtor will be in a position to meet his obligations under the PIA going forward. Given the rigorous approach usually taken by the Revenue Commissioners, this is a sign of confidence in the debtor which I believe should also be taken into consideration.
39. In my view, when all of the above factors are taken into account, the balance shifts in favour of the debtor notwithstanding his failure to explain his poor payment record (in respect of his indebtedness to the bank) in the two year period prior to the grant of the protective certificate. However, before reaching any final conclusion it is necessary to consider the remaining concerns highlighted by the bank in the course of the hearing before me.
The failure to make payments during the protection period
40. As counsel for the bank acknowledged in the course of his submissions, this point is linked to the debtor’s pre- certificate payment record discussed above. While s. 115A(10) is not concerned with payment history during the protection period, counsel for the bank submitted that a failure to make any payments during the protection period was relevant to the exercise of the discretion of the court under s. 115A. Counsel cited, in this context, to the decision of Baker J. in Michael Ennis [2017] IEHC 120 where Baker J. referred to the obligation imposed on a debtor by s. 118(1) of the 2012 Act to act in good faith. In that case, the debtor had made a unilateral decision to cease payments without consulting the practitioner or his legal team. Nonetheless, the debtor there swore an affidavit in which he contended that he had been making monthly payments since he engaged a practitioner. Having referred to the obligation of good faith imposed on debtors under s. 118, Baker J. continued as follows at paras. 50-54 of her judgment: –
“50. Such an obligation [of good faith] is also implicit in any application where a litigant engages the discretion of the court, and arises from the nature of the process which affords a debtor a chance of . . . resolution of debt by the forgiveness of significant debt due to secured or unsecured creditors, or the variation of the conditions of a loan.
51. Further, the court is required in the context of s. 115A to have regard to the relevant matters contained in s. 115, including ss. 115(9)(b) and (c), and to the grounds of challenge contained in section 120. These factors engage questions of the bona fides of the debtor. Indeed, the debtor himself recognises this and at para. 17 of his first affidavit . . . he expresses the proposition that he has been making monthly payments in excess of the payments proposed in the PIA since he met . . . the PIP, . . . . At the time that affidavit was sworn, [the debtor] had ceased making those payments . . .
52. Counsel for EBS suggests that the behaviour of the debtor is akin to ‘holding the process to ransom’, and while I do not propose to adopt that description, I am satisfied that the debtor has not engaged bona fide with the process, nor with the PIP engaged to act as financial intermediary in the process, nor with his legal team.
53. He has made it clear that the decision to cease payments was made unilaterally, and avers at para. 5 of his second affidavit that the payments were stopped without first consulting either the PIP or his legal team. Indeed, it seems that the debtor permitted his affidavit to be presented for the purposes of a notice of appeal . . . without informing his PIP or his legal advisors of that very significant discrepancy. His lack of candour is material and serious.
54. For those reasons, and in the exercise of my discretion, I propose making an order refusing the appeal and thereby upholding the objection of EBS.”
41. I do not believe that this passage from the judgment of Baker J. goes so far as to suggest that non-payment of liabilities during a protection period will be sufficient of itself to persuade a court to exercise its discretion against the grant of relief under s. 115A. On the contrary, it seems to me that Baker J. was very concerned about the lack of candour on the part of the debtor in that case. He had sworn an affidavit (which he relied upon for the purposes of an appeal) in which he contended that he was making payments on a monthly basis. That averment turned out to be untrue. That was a very obvious instance of lack of candour on the part of the debtor in that case and it is unsurprising in those circumstances that Baker J. should refuse relief. There do not appear to have been any countervailing circumstances in that case which would have caused the court to excuse the lack of candour on the part of the debtor there. Moreover, it is clear from the consideration of the judgment as a whole that, in that case, there were very significant doubts as to whether it was feasible for the debtor to retain the principal private residence. The residence was in a state of disrepair. It had been broken into. The water pump, oil burner and oil tank were stolen. There was no running water. There was a significant planning issue with the property and it was questionable whether the property was, in truth, habitable at all.
42. In my view, the position here is different. While I deprecate any failure by a debtor to make some attempt to deal with ongoing liabilities during the protection period, there is no lack of candour on the part of the debtor here in relation to his failure to make payments during the protection period. In para. 20 of his first affidavit, the debtor dealt with the position as follows: –
“In regard to [the bank] . . . , I say that for the reasons outlined above, I have not been in a position to make any payments to my mortgage for about the past eleven months. However, as things have now begun to improve following the change in my trading . . . , I am in a position to pay up to €1,500.00 per month (depending on receipts). In that regard I did go to AIB Bank in Ballsbridge in the first week of April with a view to setting up a standing order and I was advised that they would contact me about this. However, they have not done so. I previously had been dealing with Mr. Donal Daly of AIB Ballsbridge, and I did attempt to make contact with him in early April, but he is now retired. I met a lady who took all the relevant details and said it would be in contact with me, but to date I have not heard from them”.
43. In response, Mr. Walsh, in para. 8 of his affidavit said that there was no impediment to the debtor setting up a standing order or to lodge funds directly to his mortgage account. Nonetheless, he does not deny that the debtor approached the bank in April 2018. However, when the debtor came to reply to that affidavit, he appeared to set up an entirely different explanation for the non-payment of the mortgage during the protection period. In para. 9 of his second affidavit, he said: –
” . . . the payment to [the bank] has represented a bona fide attempt to show a willingness to continue to engage and to make payment. I say and I understand that any payment made during the Protective Certificate period, particularly to one creditor above others, could be deemed a preferential payment and could in fact be set aside. I say and believe that I am also concerned that the PIA specifies an amount to which my loan is to be restructured and a payment from the commencement of the PIA and in those circumstances I was unsure as to whether I ought to pay a sum towards a restructured mortgage that has not yet been restructured”.
44. It is very difficult to reconcile this explanation with the explanation previously given in the debtor’s first affidavit that he had sought to commence repayments in April 2018. The evidence of the debtor is therefore quite unsatisfactory in relation to this issue. However, I do not believe that I can go so far as to hold that it shows a lack of candour. Moreover, while I am very definitely of the view that a debtor should seek to address ongoing liabilities (to the extent that he or she lawfully can) during the currency of the protection period, there is no statutory requirement in the 2012 Act that a debtor must meet his or her liabilities during that period.
45. Moreover, in considering this ground of objection, I must again weigh in the balance the factors outlined above in connection with the pre-certificate payment record. When those factors are taken into account, I am of the view that the failure of the debtor to address his liabilities to the bank during the currency of the protection period, is not sufficient, of itself, to persuade me to exercise my discretion against the grant of relief under s. 115 A.
The liabilities of the debtor in the post – PIA period
46. There was a sharp difference of opinion between counsel for the practitioner on the one hand and counsel for the bank as to whether the court, on an application of this kind, should have regard to the affordability of payments by a debtor in the period subsequent to the expiry of the PIA. In this context, I should explain that the bank contends that the debtor should be able to afford more significant payments to the bank than are proposed under the PIA and that this is especially so once the 72 month period of the PIA has expired. In addition, the bank is concerned that the business prospects of the debtor could improve significantly over the next 72 months and the bank complains that there is no scope under the present proposals to increase the post-PIA payments to the bank in the event that there is a substantial improvement in the profitability of the debtor’s business. The matter is expressed in the following way in para. 26 of the affidavit of Ms. Mooney: –
“The . . . matter of greatest concern to the Bank in respect of the specific provisions of the [proposed PIA] is the fact that the [PIA] proposes to write off a significant portion of the Debtor to the Bank in circumstances where the financial position of the Debtor would appear to allow him to make greater repayments in respect of his home loan. The [PIA] proposes a monthly repayment of €1,126.86 . . .for the six – year period of the [PIA] and thereafter a payment of €1,334.18 until the end of the remaining 300 – month term of the mortgage. This is despite the fact that the Debtor clearly has a greater capacity to make repayments in respect of his home loan based on his current income”.
47. Counsel for the bank submitted that it was clear from the view taken by Baker J. in Laura Sweeney [2018] IEHC 456 at para. 56, that a court, on an application of this kind, was not concerned solely with the question of affordability to the debtor during the period of the PIA. In that judgment, Baker J. said: –
“A write down of a mortgage to market value is not mandated by the Act, and it may be possible in certain cases to split or warehouse part of a loan . . . The determination as to whether a mortgage debt is to be written down is to be made by reference to the affordability of payment. A draft PIA is in general more focused on ascertaining a capital figure, repayment of which is affordable by the debtor, rather than seeking to ensure that the debtor is no longer burdened with a mortgage far in excess of the value of the secured property”.
48. In contrast, counsel for the practitioner sought to suggest that the focus on an application of this kind is on the question of affordability during the currency of the PIA. He relied in particular on the following observation of Baker J. in Clive Casey (Unreported, 29 May 29 May 2017) where she said at para. 29: –
“I also accept the argument of the debtors that it is not the intention of the Act that a debtor be confined to the basic reasonable living expenses set out by the Insolvency Service . . . for the rest of his or her life , and that the general scheme of the Act is that a debtor will in the currency of a PIA bring into account to the maximum extent possible his or her assets and income, and that on the performance of the obligations of the assets in the PIA the debtor will be relieved of identified debt. Such an approach to post – arrangement is familiar in the scheme of bankruptcy legislation” (emphasis added).
49. Counsel also submitted that, in a bankruptcy, once the bankruptcy period is over (at which point the bankrupt would be forgiven all of his or her debts) the bankrupt is free to carry on whatever business and make whatever profits he or she can and the pre-bankruptcy creditors have no recourse in those circumstances.
50. Counsel also relied on a number of observations of Baker J. in Paula Callaghan (Unreported 22 May 2017). In particular, he relied on the following observation at para 68 of her judgment where Baker J. said: –
“A court must be satisfied taking all matters into account that the proposed PIA enables the creditors to recover the debts due to them to the extent of the means of the debtor. The “means” engaged are present income and capital assets and not the projected means at a time so far into the future that the test is based on hypotheses or conjecture. There may on the other hand be circumstances where future certain or ascertainable means are to be brought into account”.
51. With regard to the last sentence in that extract, counsel suggested that one such circumstance would be where the debtor has a pension provision which will not become payable until retirement age. Counsel distinguished such an asset (which was relatively certain) from hypothetical receipts at some stage in the future which were entirely uncertain. Thus, in Paula Callaghan , the judge rejected a proposal to warehouse an amount for payment in the future in circumstances where there was no present expectation that the debtor would be in a position to pay the amount proposed to be warehoused. Baker J said at para. 72 of her judgment: –
“The Act requires a proposal to bring to reasonable account the means of a debtor. The proposal to warehouse an amount that at current figures is more than 125% of the value of the dwelling is not proportionate to, or reasonably derived from, the current income and capital assets, or any future ascertainable means. I am 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”.
52. In my view, those extracts from the judgments of Baker J. show very clearly that there is no hard and fast rule in relation to how debt is to be treated after the expiry of a PIA. Everything will depend upon the circumstances of an individual case. That said, the court will not involve itself in speculation about what might potentially happen in the future. In my view, the principal concern of the court will inevitably be focused on what is to happen during the currency of the PIA. The approach to be taken by the court in relation to the PIA period will always be informed by what the court considers the means of the debtor will reasonably permit. This is clear from the provisions of s. 115A(9)(b)(ii). The approach to be taken is encapsulated in para. 59 of the judgment of Baker J. in Paula Callaghan where she said: –
“Section 115A(9)(b)(ii) constrains a court by considerations of reasonableness, that there be a reasonable prospect that confirmation of a proposed PIA will enable the debtor to resolve his or her indebtedness, and enable the creditors to recover their debts to the extent that the means of the debtor ‘reasonably permit’. The inclusion of a requirement of reasonableness supports the argument that a margin of appreciation will be afforded to a PIP in formulating a PIA, that the court will not interfere unduly with a proposal even if another and possibly equally reasonable proposal could be formulated, and the objection of a creditor will not be upheld merely on account of the fact that it can offer an alternative proposal. Reasonableness is assessed in the context of the means of the debtor, the likely return to the creditor of a proposal, the likely return on bankruptcy as an alternative, and the reasonableness of the proposed scheme taken as a whole, and in the light of the objective of the legislation that a debtor be facilitated in a return to solvency”.
53. On the other hand, as Baker J. said in re: Hill [2017] IEHC 18, the court must consider whether the PIA is fair to all classes of creditors. The court must take a balanced approach. In that case, she said at para. 37: –
“The statutory factors relate to the proportionality of the arrangement, the likely differences between the PIA and an arrangement on bankruptcy, and whether the PIA is fair to all classes of creditors. While the intention of the Oireachtas was to offer a unique and special protection to the principal private residence, that protection did not enable the court to override the vote of a creditor holding security over such property merely on account of the fact that the property was a principal private residence, and other factors resonant of an attempt to achieve a degree of balance of each of them is found in the legislation”.
54. On the evidence available to the court in this case, I am satisfied that the entire of the debtor’s means have been utilised for the purposes of the PIA. Appendix 4 to the proposed PIA demonstrates this very clearly. In particular, it shows the entire income over the six-year period of the proposed PIA being applied in discharge of set costs, mortgage payments, and additional expenses (made up of management fees and property tax). When all of these costs and expenses are set off against the net income per month, this will provide a net monthly contribution of €535 or €6,420 on an annual basis. In the first year, €5,051 of this figure will be used to discharge part of the fee due to the practitioner, leaving a balance of €1,369 available to be paid to the Revenue Commissioners. In years 2-4, the payment to the practitioner will reduce to €1,352 per annum, and the payment to the Revenue Commissioners will increase to €5,068. In years 5 and 6 the balance due in respect of practitioners fees will be paid together with the balance due in respect of the Revenue Commissioners and the dividends to the unsecured creditors will also be paid in these years.
55. While it is true that the debtor, in para. 20 of his first affidavit suggested that he would be in a position to pay up to €1,500 per month in respect of mortgage payments, it is clear from a consideration of Appendix 4 that this is not feasible. It is, of course, the case that the income of the debtor may increase over the duration of the PIA. However, as noted above, this will be to the benefit of all unsecured creditors (including the bank in respect of the unsecured element of its debt). I cannot see that there is any unfair prejudice to the bank in relation to the payments to be made to it during the currency of the PIA. I also bear in mind in this context that, in contradistinction to many other PIA proposals, the secured debt is not being written down to the current market value of the apartment. As noted above, the value of the apartment is €265,000. Under the proposed PIA, €290,000 will be treated as secured debt. Appendix 5 also shows that the outcome for the bank in a bankruptcy of the debtor is significantly worse than under the proposed PIA. In a bankruptcy, the bank would ultimately recover 49c in the euro. Under the PIA, its total recovery will be 60c in the euro which represents a 22% improvement over its position in a bankruptcy.
56. In light of the considerations outlined above, it is unsurprising that counsel for the bank, in his submissions to the court, concentrated on the period after the expiry of the PIA. He suggested that more significant payments could be afforded by the debtor than the monthly payment of €1,334.18 provided for under the terms of the proposed PIA. Counsel argued that the improved climate for the building trade meant that it was almost inevitable that the profits of the debtor would improve over time. He also drew attention to the fact that, following the conclusion of the PIA, the debtor will no longer have to make payments in respect of the arrears of management charges which had built up in respect of his apartment complex. In this context, it should be noted that under the heading of “Additional Expenses” identified in Appendix 4 to the PIA, there is a sum of €125 per month being paid in respect of arrears of management charges. This sum will be available to the debtor once the PIA has been successfully concluded.
57. Notwithstanding the very able and impressive arguments of counsel for the bank, I do not believe that there is any basis for the court to reach a conclusion, that the debtor will, on the expiry of the PIA, be able to afford more significant mortgage repayments than those provided for in Appendix 7 to the PIA (namely €1,334.18 per month for the remaining 300 months of the mortgage term. In this regard, I entirely accept the submission made by counsel for the practitioner that, following the successful completion of a PIA, a debtor should not be confined to the reasonable living expenses published by the Insolvency Service of Ireland (“ISI”).
58. A debtor who successfully completes a PIA must be given the opportunity to return to some semblance of normal life. It is normal to compare the outcome of a PIA against a bankruptcy. One must bear in mind that in the context of a bankruptcy, once the bankrupt emerges from the bankruptcy process, he or she will be entitled to the fruits of any money earned thereafter. In my view, that is a factor that must be borne in mind.
59. In addition, as the judgments of Baker J. make clear, the court cannot proceed on the basis of conjecture or hypothesis as to what might happen in the future. The court has to assess the position as of now. On the basis of the material before the court, there is nothing sufficiently concrete to suggest that the debtor will be in a position to readily afford more than the mortgage repayments post PIA which are currently envisaged in Appendix 7 to the PIA. This is not a case where the debtor has any pension provision. Nor is there any other event on the horizon which is likely to swell his assets. Furthermore, having regard to the age of the debtor, there is no foreseeable prospect that his living expenses are likely to fall in the years following the completion of the PIA. This is to be contrasted with cases where, for example, the debtor has a family that are likely to become financially independent in the years immediately after the completion of a PIA. In such cases, there may be scope to take the view that the debtor will be able to afford more in the way of repayments than that is currently envisaged here. I fully appreciate that, in this case, the debtor will no longer have to pay €125 per month in respect of the arrears of management charges. However, that is a benefit of a very modest scale. It is far from being a ” game-changer “. As I have already indicated, the debtor must be given some scope to escape from the narrow confines of the ISI concept of reasonable living expenses once the debtor has earned his ability to do so following the successful completion of a PIA.
60. In all of the circumstances, I am of the view that there is no sufficient basis, on the evidence available in this case, to suggest that the rate of payment to be made to the bank in respect of the mortgage, following completion of the PIA in this case, gives rise to unfairness to the bank or to some disproportionate benefit to the debtor. In my view, the proposed PIA in this case is fair to all of the creditors of the debtor (including the bank). Insofar as the bank is concerned, there is a significant benefit to it under the proposed PIA in circumstances where the secured debt is not written down to the value of the apartment and where, as Appendix 5 makes very clear, it will fare much better under this PIA than it would in a bankruptcy.
Conclusion
61. On the basis of all of the evidence before the court I respectfully take a different view to that taken by the learned Circuit Court Judge. In particular, I am persuaded by the evidence and the submissions that have been made to me that this is an appropriate case in which to grant the relief claimed under s. 115A(9) of the 2012 Act (as amended). In reaching this conclusion, I have, of course, had regard for the matters set out in s. 115A(10). I have also satisfied myself as to each of the matters set out in s. 115A(8) and s. 115A (9).
62. Therefore, I will make an order setting aside the order made by the learned Circuit Court Judge on the 24th of July, 2018 and, instead, I will confirm the coming into effect of the proposals for the PIA in this case in accordance with their terms.
Personal Insolvency Acts 2012-2015 v McNamara
(A Debtor) [2020] IEHC 103 (02 March 2020)
JUDGMENT of Mr. Justice Denis McDonald delivered on 2 March, 20201. In a judgment delivered by me on 20th August, 2019 in these proceedings and ininterconnected proceedings involving Mr. McNamara’s wife, I set out my conclusions inrelation to the bulk of the issues which arise for consideration in these cases. However, Iwas unable to reach a final determination in relation to three grounds of objection whichhad been raised by Tanager DAC (“Tanager”) a secured creditor, holding a mortgage overthe family home of Mr. and Ms. McNamara (which is also their principal private residencewithin the meaning of s. 2 of the Personal Insolvency Act, 2012). The grounds ofobjection in question were:-(a) That the proposed arrangements unfairly prejudice the interests of Tanager and areinequitable;(b) That there is no reasonable prospect that confirmation of the arrangements willenable Tanager to recover the debts due to it to the extent that the means of Mr.McNamara and Ms. McNamara reasonably permit;(c) That the requirements of s.91 (1) (e) of the 2012 Act (dealing with the making of acomplete and accurate prescribed financial statement by a debtor) have not beensatisfied;2. As noted in para. 87 of my judgment of August 2019, there is a common threadunderpinning each of these grounds of objection. In support of each of these grounds ofobjection, Tanager drew attention to the discrepancies between (a) what was stated in aStandard Financial Statement (“SFS”) completed by Mr. McNamara in January 2016 at therequest of Tanager and (b) the information provided in his Prescribed Financial Statement(“PFS”) completed in October 2016 in support of his application for a protective certificateunder the 2012 Act. In the SFS completed in January 2016, it was stated that Mr.McNamara had a half share in his parents’ house along with his sister. Opposite thatentry a “current value” of €500,000 was given. In addition, the SFS showed a monthlyrental income of €800 which represented Mr. McNamara’s share of the rent in respect ofhis parents’ home. However, when he came to make a PFS for the purposes of seekingrelief under the 2012-2015 Acts, he placed a value of €182,500 on his interest in hisparents’ home (although this was stated to be an approximate value). In addition, on p.4 of the PFS (dealing with income) it was stated that Mr. McNamara had no income fromrent.3. The inconsistencies between the SFS and the PFS fed into each of the three grounds ofobjection mentioned in para. 1 above. In the first place, Tanager argued that the SFSdemonstrated that there were assets available to Mr. McNamara that were moreextensive than the assets which he had disclosed in his PFS and that this meant that thePage 2 ⇓full means of Mr. McNamara to discharge the debts owed by him to creditors are notbrought to bear under the proposed arrangement. Counsel for Tanager submitted thatthis gave rise to obvious unfairness to Tanager against a backdrop where Tanager wouldsuffer such a substantial write-down of the debt due to it under the proposedarrangement. If Tanager was correct on either of these points, the arrangement could notbe confirmed by the court. Under s. 115A (9) (f), the court must be satisfied that thearrangement is not unfairly prejudicial to the interests of a party such as Tanager.Secondly, under s. 115A (9) (ii), the court must be satisfied that the arrangement willenable the creditors to recover the debts due to them to the extent that the means of thedebtor permits. Thirdly, under s.115A (8) (a) (i), the court must be satisfied that therequirements of s. 91 have been complied with. Under s. 91 (1) (e) there is arequirement that a debtor must make a complete and accurate PFS. In light of theapparent discrepancies between the SFS and the PFS, Tanager argued that this statutoryrequirement had not been satisfied in this case.4. As a consequence of the discrepancy between the information contained in the SFS andthe PFS (insofar as the value of the inheritance and insofar as the rental income wereboth concerned), I formed the view (as set out in my August 2019 judgment) that Mr.McNamara was under an obligation to explain himself. On the face of it, the discrepancyraised an issue as to whether the full means of Mr. McNamara and Ms. McNamara hadbeen brought to bear for the benefit of their creditors under the proposed arrangement. Ialso expressed the view in para. 94 of my judgment that it is vitally important, inproceedings under the 2012-2015 Acts, that debtors proposing to seek relief under theActs should comprehensively and accurately disclose all of their assets and liabilities intheir PFS. That is a crucial statutory requirement and it is fair to say that the properfunctioning of the system depends on full disclosure being made.5. In those circumstances, I adjourned the matter to allow Mr. McNamara to furnish afurther affidavit explaining the discrepancy between the SFS on the one hand and the PFSon the other.The new affidavit6. On 23rd September, 2019 Mr. McNamara swore a further affidavit. In that affidavit heexhibited, for the first time, his late father’s will, the grant of probate issued to his sisteron 23rd August, 2017 and the Inland Revenue affidavit sworn by his sister in support ofthe application for the grant of probate and also disclosing the assets of the deceased.Insofar as the value of his own inheritance is concerned, he explained that, in the SFS, hehad mistakenly shown the full value of the property as distinct from his half share underhis father’s will. He also explained that he did not deduct legal or other expenses inrelation to the realisation of the property. He also did not take account of the specificlegacies made by his late father in his will which take priority over the residuary gift tohimself and his sister.7. When it came to making the PFS, Mr. McNamara relied on a valuation made by GaviganAuctioneers and Valuers which apparently placed a value of €700,000 on the property ofhis late father. From that sum, a deduction of €35,000 was made to reflect an estimatePage 3 ⇓of sales costs and legal costs at 5%. In addition, the specific legacies under the will(which included not only bequests to the grandchildren of Mr. McNamara’s father but alsotwo gifts to charity) had to be taken into account. These amounted in total to €300,000.This left a net value remaining for Mr. McNamara and the other residuary legatee, hissister, of €365,000. Mr. McNamara’s 50% share of €365,000 was therefore correctlyrepresented at €182,500.00 in his PFS.8. Mr. McNamara also explains in his affidavit that, since the PFS was prepared in October,2016, there has been an increase in value of the property held within his father’s estate.According to the Inland Revenue affidavit filed in respect of his father’s estate, the grossvalue is now of the order of €800,237.00 and the net value is of the order of€783,153.00. When the value of the specific legacies is taken into the account, there willbe an estimated balance of €483,153.00 (before payment of legal costs and otherexpenses) available to Mr. McNamara and his sister as the residuary legatees. On theassumption that costs and expenses will be of the order of €40,000, this would leave abalance for distribution to Mr. McNamara and his sister of €443,153.00 of which 50%(€221,576.50) would fall to be distributed to Mr. McNamara. These values are allestimated. Although Mr. McNamara’s father died in 2009 and a grant of probate issued in2017, no steps have yet been taken to realise the property the subject of the estate. Atpara. 29 of his affidavit Mr. McNamara says:-“29. I say … that the full net realisable value from the inherited properties is going to mycreditors. I say and confirm that 100% of my inheritance is going to creditors…”.9. In his affidavit, Mr. McNamara also deals with the rent. He explains that when he met Mr.James Green, the personal insolvency practitioner in this case, he disclosed both hisexpected inheritance and the rent to him and also explained that the property of hisfather would have to be sold in the course of administration of his late father’s estate.Although not so stated in Mr. McNamara’s affidavit, it is obvious that the property willhave to be sold if the specific legacies are to be paid and the balance distributed inaccordance with his father’s wishes to Mr. McNamara and his sister. In circumstanceswhere the property is to be sold, Mr. McNamara says that the rent could not be regardedas a stream of income that was available to service debt on a long term basis or to formpart of any arrangement. For that reason, it was not shown in the PFS as ongoingincome. Mr. McNamara also acknowledges in his affidavit that the correct legal position isthat the rent forms part of his later father’s estate and that it ought to have been paid tothe estate rather than to him personally. In paras. 11-12 of this affidavit, Mr. McNamarasays: -“11. I say … the rent was not an earned income and was more correctly part of myinheritance. …12. With this in mind, the rent formed part of the estate and would ultimately have tobe accounted for as part of my inheritance …”.Page 4 ⇓It is important to keep in mind that, as outlined in my judgment of August, 2019, thearrangement proposed by the practitioner in this case on behalf of Mr. McNamara and Ms.McNamara always envisaged that the inheritance due to Mr. McNamara from his latefather’s estate would be used to make payments to their creditors. This was made clearin para. 3.2.1 of the proposed arrangement in each case where the inheritance lump sumwas estimated at €182,500. This sum was also used in appendix 5 (which sets out acomparison of the estimated outcome for creditors in a bankruptcy, on the one hand, andunder the proposed arrangements, on the other).10. In addition to the estimated contribution of €221,576.50 to the arrangement representingMr. McNamara’s share of his father’s estate, Mr. McNamara has now made clear that hewill also make available a further sum to represent rent that should have accrued to thebenefit of the estate (and thereby to the benefit of the proposed arrangement which, asnoted above, is to be funded in part by the inheritance from Mr. McNamara’s father’sestate). In para. 13 of his affidavit, Mr. McNamara says that a sum of €28,800.00 inrespect of rent is now held by Devaney & Partners, the solicitors acting on behalf of hissister in administering the estate. He says (plainly incorrectly) that this equates to 36months’ rent from the date of the SFS to the date of swearing of his affidavit inSeptember 2019. That, clearly, is not correct given that the SFS was completed inJanuary 2016 which is more than 36 months prior to the swearing of his affidavit inSeptember 2019. The correct position was subsequently clarified and is described inpara. 11 below.11. Following the delivery of Mr. McNamara’s affidavit, a number of queries were raised bythe solicitors acting on behalf of Tanager. Regrettably, there was significant delay inresponding to those queries. The questions principally related to the rent. The solicitorsfor Tanager wished to know when the solicitors for the estate of the late Mr. McNamarareceived the sum of €28,800, the identity of the person who made the payment and, ifmade by Mr. McNamara, the bank account from which the payment was made. Inaddition, the solicitors queried how it could be said that the sum of €28,800 representedthe rent from the date of the SFS in January 2016. Ultimately, it was confirmed by thesolicitors for the practitioner in a letter dated 31st October, 2019 that the sum of €28,800represented the accrual of rent from the date of the protective certificate in October 2016to September 2019. The letter also stated:“… the monies or the rental monies accrued from the tenants for the benefit of theEstate, and were given into the Devaney & Partners account by family members(noting that Mr. McNamara’s sister and family are … beneficiaries).[The sum of €28,800 was] paid into the solicitor’s account (for the Estate) fromMrs. McNamara’s account (and it was put into Mrs. McNamara’s account by familymembers … Mrs. McNamara received the monies into her account on the 23rdSeptember, 2019 …As you will have noted, this rental income (… being an income into the Estaterather than to Mr. McNamara) was disclosed to Tanager in the SFS and there hasPage 5 ⇓been no attempt to hide it. Mr. McNamara’s share of the Estate is fully disclosed inthe PFS. The PIA shows the full share of the Estate being taken for the benefit ofcreditors. The … issue has arisen by virtue of the passage of time during the 115Aprocess where no party expected the process to take this long … If the PIA hadbeen approved at the Creditor’s Meeting there would have been no issuewhatsoever and no rent due to the sale of the property as per the terms of the PIAin effect, the issue was created by delay. However the creditor (in particularTanager) will benefit from this delay as the share of the Estate that is beingcontributed into the PIA has now increased in value (both property value andaccrued rent value). The full value of Mr. McNamara’s share of the rent and theEstate is being taken for the benefit of the PIA …”.12. The explanations offered by the solicitors for the practitioner prompted an affidavit to besworn on behalf of Tanager by its solicitor, Mr. Peter Bredin which was sworn on 22ndNovember, 2019. In that affidavit, Mr. Bredin suggested (with some justification) that itis difficult to understand why certain unidentified family members paid the rent to Ms.McNamara in the first instance who then paid the money in question to the solicitorsacting in relation to the estate of Mr. McNamara’s father. In response, Mr. McNamaraswore a further affidavit on 4th December, 2019. In that affidavit, Mr. McNamarareiterated what he had said in his previous affidavit that he had, at the outset, disclosedthe receipt of rent to the practitioner. At that time, it was envisaged that the processunder the 2012-2015 Acts would be completed within a matter of months. It was neveranticipated that the process would last as long as it has. Mr. McNamara is correct. Thiscase has taken an unusually long time to be finalised. In this context, it should berecalled that, as noted in para. 10 of my judgment of August 2019, the hearing of thepractitioner’s application under s. 115A (9) was delayed for a significant period for anumber of reasons. In the first place, in light of an objection raised by Tanager, it wasnecessary to await the outcome of the issue as to the proper party to prosecute a s. 115Aapplication. That issue was determined by Baker J. in Meeley (a debtor) [2019] 1 I.R.235 in her judgment delivered in February 2018. Thereafter, in accordance with thatjudgment, in June 2018, the practitioner brought an application to amend the notice ofmotion to disclose the correct moving party. That application was contested by Tanagerand ultimately a hearing was held which resulted in a judgment given by me in December2018 in which I decided that the practitioner should be allowed to amend the notices ofmotion. Thereafter, the application under s. 115A was adjourned on a number ofoccasions, at the request of Tanager, in order to give Tanager the opportunity to file afurther affidavit in opposition to the substantive application. Ultimately, when no affidavitwas forthcoming, I directed that the hearing of the s. 115A (9) application should proceedin the absence of any further affidavit from Tanager. The substantive hearing took placeon 27th May, 2019. Judgment was given on 20th August, 2019 following which furtheraffidavits were exchanged (as detailed in this judgment) and two further hearings tookplace on 9th December, 2019 and 17th January, 2020.13. In para. 4 of his affidavit sworn on 4th December, 2019, Mr. McNamara provides thefollowing further explanation in relation to the rent:-Page 6 ⇓“4. the portion of the rental income received from the letting of my late father’s house,while it was being received, was utilised by us for basic living expenses and nothingmore. While we are no longer in receipt of that rental income, I havesupplemented my income as a result of having concluded an arrangement withfuneral service providers and I am now playing the piano at funerals and in recenttimes, I am playing at least one funeral per week, for which I receive an average€150.00-200.00, which at a minimum of four funerals per month, amounts to the€800.00 figure which we had been receiving from the rent, and possibly even more.When (sic) Objecting Creditor made an issue of the rental income in recent times,to reimburse the estate the value rent (sic) received during the period of delay, weasked for and we received a gift from family members to allow us to reconcile theaccount and credit back to the estate account, the necessary amount of money”.14. A number of observations must be made in light of this averment by Mr. McNamara:-(a) In the first place, it is clear from what is said here that Mr. McNamara and hisfamily were in fact making use of the rental income for the purposes of their basicliving expenses notwithstanding that the income in question was never factored intothe estimate of monthly income and expenditure set out in appendix 2 to theproposed arrangement. The income shown in that appendix is made up exclusivelyof the “self-employed” income of Mr. and Mrs. McNamara together with additionalpension income in respect of Ms. McNamara. Although not expressly stated by Mr.McNamara, an implication arises that this must have been the position going backto very soon after his father’s death in 2009. As counsel for Tanager observed inthe course of the hearing which took place on 9th December, 2019, this wouldsuggest that a figure in excess of €60,000 has been utilised by Mr. McNamara overthe course of the period between 2009 and 2016 when the protective certificatewas issued in the present case.(b) In circumstances where the McNamara household required to use an additionalsum of €800 per month (which is not factored into the income and expenditurecalculation set out in appendix 2 to the arrangement) the question arises as to howthe arrangement can be said to be sustainable in circumstances where that incomewill not be available into the future, once the relevant property is sold during thecourse of the completion of the administration of the estate of Mr. McNamara’s latefather. However, it is clear from what is said in para. 4 of the affidavit sworn on4th December, 2019 that Mr. McNamara has now supplemented his income byproviding music at funeral services. That will provide an additional source ofincome for Mr. McNamara over and above the income disclosed in appendix 2 to thearrangement. The current level of earnings from that source of income appears toequate in round terms with the level of income previously received from the rents.To the extent that his income from funerals or other sources exceeds the level ofincome disclosed in the proposed arrangement, that income will, in the event thatthe arrangement is confirmed by the court under s. 115A (9), fall to be dealt with inaccordance with Clause 12 of Part V of the standard terms of the arrangementPage 7 ⇓under which 50% of the additional income over and above €100 per month will bedistributed to the unsecured creditors of Mr. McNamara. In that way, theunsecured creditors will benefit from the proposed arrangement. Likewise, Tanagerwill benefit to the extent that it shares in the dividend to be paid to the unsecuredcreditors. In accordance with Clause 12 of the standard terms, this additionalpayment to creditors will be available for the duration of the arrangement.(c) In my view, the fact that the McNamara household had been using the rentalincome in order to discharge basic living expenses is a fact that should have beendisclosed at an early stage in the s. 115A application. It was a material fact in thecontext of the sustainability of the arrangement and also in the context of theextent of the income necessary to fund the day to day living expenses of theMcNamara household. However, it is clear from Mr. McNamara’s affidavit ofSeptember 2019 that he disclosed the receipt of rent to the practitioner. The non-disclosure of the rent to the court is therefore primarily a matter which rests withthe practitioner rather than Mr. McNamara personally. It is a matter which shouldhave been brought to the attention both of the court and of Tanager by thepractitioner. It is clear from the judgment of Baker J. in James Nugent[2016] IEHC 127 that a practitioner has a duty of frankness and full disclosure. At para.31 of her judgment in that case, Baker J. said:-“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, andthis puts the PIP in a unique position of responsibility to the InsolvencyService …, the court, the creditors and of course to the debtor. That thisimports a duty of frankness and full disclosure seems to me to beunequivocal, 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 courtexpects a full, professional and objective approach. The PIP may, but doesnot always engage a solicitor, but the obligation of frankness must be onewhich the PIP bears personally by virtue of his unique role at the centre ofthe process, and as the person uniquely with standing to bring application tothe court.”I will consider, further below, what consequences flow from the fact that the use ofthe rental money by Mr. McNamara was not disclosed in the present case.15. In para. 5 of his affidavit, Mr. McNamara explains that the sum of €28,800 mentioned inpara. 10 above has been paid to the solicitors acting in the estate of his late father fromfunds received from family members who have provided it by way of a gift on the expressagreement that they would not be identified in the course of these proceedings.Therefore, it appears to be the case that the sum of €28,800 has been collected fromfamily members with a view to replacing an equivalent sum previously collected fromtenants and which had been utilised by Mr. McNamara to discharge living expenses. Inpara. 6 of his affidavit, Mr. McNamara makes clear that this sum of €28,800 will be madePage 8 ⇓available in full to the creditors of Mr. McNamara and Ms. McNamara and will thereforeincrease the rate of dividend to be paid to the creditors. In the course of the hearing on9th December, 2019, counsel for Tanager suggested that these arrangements are in thenature of loans and that, as a consequence, they have increased the liabilities of Mr.McNamara. Counsel argued that, accordingly, a significant question mark now arises inrelation to the sustainability of the arrangement. In my view, this argument on the partof counsel for Tanager is mistaken. It is clear from Mr. McNamara’s affidavit that themoneys advanced by family members were advanced by way of gift. They are not a loan.Accordingly, Mr. McNamara’s liabilities are not increased as a consequence – save to theextent that there may potentially be a tax liability in respect of this gift. This is an issuewhich I address in para. 20. As discussed in para. 17 (c) below, counsel for Tanager, atthe hearing on 9th December, 2019, also argued that Mr. McNamara must now owemonies to the estate of his later father as a consequence of the drawdown of the rent inthe period between 2009 and 2016 which, as noted in para. 12 (a) above, counselsuggested was of the order of €60,000. That is a separate issue which I address in para.17 (c) below.16. In para. 7 of his affidavit Mr. McNamara very helpfully exhibits an updated set of tableswhich shows the level of dividend that will now be paid as a consequence of the provisionof the sum of €28,800.00 and the expected enhanced value of the legacy to be receivedby Mr. McNamara from his father’s estate. This shows that the dividend to the unsecuredcreditors is likely to increase from 5 cent in the euro to 7 cent in the euro. This comparesto a dividend of 3 cent in the euro in the event of the bankruptcy of Mr. McNamara and adividend of nil in the event of the bankruptcy of Ms. McNamara. These are obviouslyestimated figures in light of the fact that, until the property of Mr. McNamara’s late fatheris sold, the ultimate distribution to Mr. McNamara from his father’s estate cannot bequantified with complete precision. What is clear, however, is that Mr. McNamara hascommitted to make the entire of the inheritance together with the sum of €28,000.00available to the practitioner in order to fund the dividend to the unsecured creditors andthe payment of €100,000 to Tanager in accordance with the terms of the arrangement.What the updated tables show is that, having regard to the rise in property prices in theintervening period, there will be an increase in the dividend payable over and above thatenvisaged at the time the arrangement was first proposed.17. In the course of the hearing on 9th December, 2019, counsel for the practitionersubmitted that the affidavits of Mr. McNamara satisfactorily explain the discrepancy whicharose as between the SFS and the PFS. He therefore submitted that the court was now ina position to reach a determination under s. 115A (9) and he submitted that it wasappropriate, in all of the circumstances, to make orders confirming the coming into effectof the proposed arrangement both in this case and in the interlocking proceedingsinvolving Ms. McNamara. However, counsel for Tanager argued to the contrary. Hemade the following submissions:-(a) In the first place, he argued that it was artificial and arbitrary to take the date ofthe protective certificate as the date from which the rental payments would bePage 9 ⇓applied for the benefit of the creditors. Counsel argued that the figure of €28,800was an underestimate of the rents received by Mr. McNamara. He argued that itwas clear that a sum in excess of €60,000 had already been applied prior to thedate of the protective certificate by Mr. McNamara going back to the date of deathof his father;(b) Counsel also argued that the affidavits sworn by Mr. McNamara were very vagueand lacking in detail. He suggested that they raised more questions than answers;(c) Counsel for Tanager placed very significant emphasis upon the fact that, on thebasis of what is said in these affidavits, Mr. McNamara must now owe the estate ofhis late father a sum in excess of €60,000 in respect of rental monies wronglydrawn down and spent by him personally. Counsel argued that this debt to theestate means that the proposed arrangement will not return Mr. McNamara tosolvency since he will be left with a debt to his father’s estate which is notaddressed in the proposed arrangement. In order to address this issue, Iadjourned the hearing for a period of one week in order to see whether the estatewould be prepared to confirm in writing that it will not seek repayment of any rentalmonies drawn down by Mr. McNamara personally. Such a confirmation was dulyreceived from the solicitors acting on behalf of the estate. However, followingreceipt of this letter, counsel for Tanager sought a further adjournment of thematter and, in the course of that adjournment, further queries were raised byTanager which were addressed in a supplemental affidavit sworn by Mr. McNamaraon 15th January, 2020. The issues raised by Tanager were the subject of a furtherhearing which took place on 17th January, 2020 (and which is addressed by me inpara. 20 below).(d) Counsel also criticised the fact that the family members who provided the gift of€28,800 were not identified. I am not sure, however, that this is material. What isclear is that the sum of €28,800 has been repaid to the estate and it will now formpart of the assets of the estate thus swelling the value of Mr. McNamara’s share inthe residuary estate. Moreover, in the course of the subsequent hearing which tookplace on 17th January, 2020, I was informed by counsel that the names of thedonors had been provided to Tanager in advance of that hearing.(e) Counsel for Tanager further suggested that there was a clear breach of s. 118 ofthe 2012 Act on the basis that there had been a failure by Mr. McNamara todisclose the receipt of rental monies by him and the use of those monies. He alsosuggested that the monies drawn down by Mr. McNamara were a “misallocation offunds” of the estate. However, it seems to me that it is not necessary to spendtime on the allegation that funds of the estate have been “misallocated”. It is clearthat the estate is not holding Mr. McNamara liable to repay these monies. On theother hand, the issue as to the receipt of rental monies is a matter which isrelevant to the court’s consideration of the application under s. 115A and is amatter which I address in more detail below. Moreover, I must bear in mind thatPage 10 ⇓the only person adversely affected by the receipt of rents is Mr. McNamara’s sisteras the co-residuary legatee under their father’s will. She is also the personresponsible for the administration of her late father’s estate. Given the terms ofthe letter from Devaney & Partners, it appears to be clear that Mr. McNamara’ssister makes no complaint about the receipt of rent by him in the past.18. Subsequent to the hearing on 9th December, 2019 and subsequent to receipt of the letterfrom Devaney & Partners (the solicitors acting in the administration of Mr. McNamara’slate father’s estate) further queries were raised in correspondence by the solicitors actingon behalf of Tanager in a letter dated 18th December, 2019. A total of eight queries wereraised as follows:-(a) In the first place, Mr. McNamara was asked to confirm the amount of rent receivedby him from the date of his father’s death up to December, 2019;(b) Secondly, Mr. McNamara was asked to confirm the precise amount of rent receivedby him prior to the date of the protective certificate;(c) Thirdly, Mr. McNamara was asked to provide copies of the rent book for theproperty from the date of his father’s death up to December 2019;(d) Fourthly, Mr. McNamara was asked to confirm how he proposed to deal with “thetax liability now arising from the gifts he received to repay the estate the rent fromthe date of the protective certificate;(e) Mr. McNamara was also asked to provide an updated breakdown of the proposedinheritance;(f) The practitioner was asked to confirm the basis on which he “elected to account forthe rent from the date of the protective certificate only”; and(g) The practitioner was also asked to confirm the basis upon which he “deemed itappropriate for Mr. McNamara to repay the rent received by him from the estatesubsequent to the date of the protective certificate but not before that date”.(h) The letter also stated that it had come to the attention of the solicitors for Tanagerthat Mr. McNamara is in receipt of additional income from the provision of pianolessons in his home. The letter attached an article from the “Irish Sun” newspaperof 16th September, 2019 which made reference to Mr. McNamara giving pianolessons in his home in order to pay off his debts. On behalf of Tanager, the lettercomplained that: “this additional income has not been disclosed to the Court andyou might explain why that it is”.19. The queries raised in the letter of 18th December, 2019 from Tanager solicitors led to afurther affidavit being sworn by Mr. McNamara on 15th January, 2010 in which heprovided the following responses:-Page 11 ⇓(a) In response to the first two questions in the letter of 18th December, 2019 withregard to the amount of rent received by Mr. McNamara from the date of hisfather’s death up to December, 2019, Mr. McNamara explained that the advances inthe “initial years” were lower and the rent received by him was approximately €500per month. He said that this arose in circumstances were: “there were some loansto pay off including burial and other expenses” and that “repairs were needed tothe houses and costs incurred”. He also said that some of the advances receivedwere used to make payments to Tanager in respect of the mortgage loan over thefamily home. He also drew attention in the same affidavit to the fact that, inrespect of the period prior to the protective certificate, the rent was disclosed in theSFS furnished to Tanager.(b) With regard to the rent books, Mr. McNamara said that he did not have any rentbook and that he had checked with his sister, the executrix, and she confirmed thatno such book exists “going back for the period sought”;(c) With regard to the question in relation to the tax liability which it was suggestedwould arise from the gift received from family members to repay the estate, Mr.McNamara responded as follows:-“I say that no tax liability arises. I say that the gifts were split individuallybetween myself and my wife and our four children from two family members,thus each portion (a sixth) was below the tax threshold”;(d) With regard to the updated breakdown of the inheritance, Mr. McNamara said thatits estimated value was now €250,377 made up as follows:-(i.) The rent: €28,800;(ii.) Sale of assets: €221,577;(e) With regard to the query as to why the practitioner had elected to account for therent from the date of the protected certificate only, Mr. McNamara said:-“14. I say that the rent was disclosed and discussed with my PIP. I confirmedthat this had been used for ordinary living expenses and also had been usedto pay my mortgage to the Objector. I say that in all reality the biggestbeneficiary of the rent pre PC was the Objector via mortgage payments. Isay that this is clear as my earned income was very low and this rent enabledpayments to be made to the Objector.15. I say that there was discussion with my PIP regarding the rent and it wasalways made clear to me that there would be a reconciliation of the rent(post the protective certificate) for the PIA and that this would go tocreditors. I say that once the PIA was put to creditors the creditorsessentially became the beneficiaries of the inheritance (to which they had norecourse or entitlement previously). Indeed, it is noted that despite myPage 12 ⇓outlining the inheritance and rent to the Objector long before the PIA theynever sought more information or this inheritance/rent to be given to them”;As noted in para. 9 above, it is important to keep in mind that, under the proposedarrangements, it was always envisaged that Mr. McNamara’s inheritance from hisfather’s estate would be made available to the creditors. It should also be recalledthat, as outlined in Mr. McNamara’s affidavit sworn in September 2019, he hadbeen advised that the rent was properly an asset of the estate and should nottherefore be regarded as part of his ongoing income. His averment that therewould be a reconciliation of the rent for the purposes of the arrangement and that“this would go to creditors” must be seen in that context.(f) With respect to the query as to the basis on which the practitioner deemed itappropriate for Mr. McNamara to repay the rent received from the estatesubsequent to the date of the protective certificate (but not before), Mr. McNamarasaid:-“I say that the rent received from the date of the PC was not ‘repaid’ butrather it was a part of the reconciliation where it was always intended thatthe rent from the date of the PC and under the PIA (until the asset was sold)would be retained for creditors and given under the PIA. I say that the issuein fact only arose due to the delay in the proceedings and if the PIA wasimmediately approved the rent would have flowed into the PIA”.Again, this averment must be seen in the context of the terms of the proposedarrangement under which, as noted above, Mr. McNamara’s inheritance from hisfather’s estate was to be made available to creditors. It must also be seen in lightof the evidence previously given by Mr. McNamara in his affidavit of September,2019 in which he explained that he had been advised by the practitioner at theoutset of the process that the rent was properly an asset of the estate rather thanpart of his own income. It could not therefore be taken into account as a source ofincome in the proposed arrangement. However, as part of the estate, it would fallto be applied, under the arrangement, in the same way as the remainder of theinheritance. The above averment that “if the PIA was immediately approved therent would have flowed into the PIA” must be seen in that light.(g) With regard to the question that was raised in relation to the provision of pianolessons, Mr. McNamara responded as follows:-“18. I say that the generation of income from teaching piano is disclosed and isreferenced in my income statement. I suspect that the newspapers pickedup an advertisement on my Facebook page and perhaps jumped to theerroneous conclusion that this was a new activity. I have been giving pianolessons at my home (and in other locations) for years.Page 13 ⇓19. I say that I do my best to earn and generate income. I say that I amactively seeking work and I am fully aware of my obligation to disclose sameand I am (and have been) fully advised as to this income (or a part thereof)being taken for the benefit of creditors. I say that as is clear from my PIA Iam living on RLE for the duration of the PIA and I still have a number ofdependent children. I am contributing to the economy and working as muchas I can. I say that I provide piano lessons, play at funerals, and other worksin the music/dance/entertainment/composing area”.20. At the subsequent hearing which took place on 17th January, 2020 counsel for Tanagerargued that the new affidavit sworn by Mr. McNamara on 15th January, 2020 contained“inconsistency after inconsistency” and that it was also inconsistent with previousaffidavits sworn by Mr. McNamara. However, counsel did not identify the allegedinconsistencies in the affidavit. He did not elaborate on this submission in any way. Themain issue raised by counsel for Tanager at that renewed hearing was that there wouldbe a liability for capital acquisitions tax (“CAT”) on the gift of €28,800 and that thearrangement did not take account of the tax liability that would arise and which wouldhave to be discharged. Counsel argued that this additional tax liability must put thesustainability of the proposed arrangement in jeopardy. I indicated that I would requireto be addressed in relation to the applicable statutory provisions and, in circumstanceswhere counsel did not have them immediately available, the hearing was adjourned to theafternoon. At that point, both counsel were agreed that, having regard to the nature ofthe relationship between the donors and Mr. McNamara, Ms. McNamara and theirchildren, the relevant exemption that applied in relation to the gift was that contained ins. 69 (2) of the Capital Acquisitions Tax Consolidation Act, 2003 (“the 2003 Act”) underwhich the first €3,000 of the total taxable value of a gift taken by a donee in any relevanttwelve month period is exempt from tax and is not taken into account in computing tax.If the €28,800 is notionally divided as between each member of the McNamara household(which is what Mr. McNamara contends occurred), each member of the household wouldbe entitled to the benefit of the €3,000 threshold and no CAT would be payable. Incontrast, if, as counsel for Tanager vigorously argued, the entire of the €28,800 should betreated as a gift to Mr. McNamara personally, then the total amount of tax that would bepayable by Mr. McNamara would be €4,100. With due respect to counsel for Tanager, Ido not believe that an additional liability to that extent (if there be such a liability) is on ascale that will put the sustainability of the arrangement at risk.Assessment and conclusions21. In my view, the discrepancy between the PFS and the SFS has been adequatelyexplained. It is clear that when the SFS was prepared, Mr. McNamara did not accuratelyevaluate the extent of his inheritance and in particular did not take into account thespecific legacies which take priority to his inheritance and the usual costs and expenseswhich arise in the administration of an estate and the realisation of assets in an estate. Itis also clear that he mistakenly included the entire value of the real property in the estaterather than his own half share.Page 14 ⇓22. The issue in relation to the rent is more problematic. In my view, the fact that the rentwas being received is a matter that ought have been disclosed in the PFS. However, it isunderstandable that the practitioner advised Mr. McNamara not to include it in the PFS incircumstances where it was envisaged, at the time, that the property would be disposedof within a relatively short time and these proceedings under the 2012-2015 Acts wouldlikewise be resolved within a relatively brief period. Nonetheless, in my view, thepractitioner should have advised Mr. McNamara to disclose the existence of the rentalincome in the PFS since it was income which was, as a matter of fact, being received intoMr. McNamara’s hand at that time.23. With regard to the suggestion by counsel for Tanager that Mr. McNamara has spent, priorto the date of the protective certificate, a sum of the order of €60,000 on day to dayliving expenses, a number of points arise. In the first place, if a sum of that order has infact been spent, it primarily relates to a period prior to the protective certificate. I shouldmake clear that, while the conduct of a debtor prior to the protective certificate is alwaysa matter to which the court will have regard (particularly in the light of s. 115A (10) (a) ofthe 2012 Act) the expenditure in question took place over a period of five years and theevidence before the court is that it was used in the discharge of basic living expenses.There is no evidence that it was spent on luxuries. I do not believe, in the circumstances,that there is any basis to suggest that Mr. McNamara should, at this stage, be required toaccount to his creditors for this money. There is no evidence of any preference beinggiven to any creditor and therefore I cannot identify any statutory basis on which I couldrequire Mr. McNamara to account to his creditors in respect of this expenditure.24. Secondly, the evidence given by Mr. McNamara on affidavit is that most of this moneywas spent in making repayments to Tanager. In this context, it is noteworthy thatcounsel for Tanager did not argue that the money should have been applied onrepayments of the mortgage due to Tanager. Instead, at the hearing on 9th December,2019, the focus of counsel’s arguments in relation to this sum was that it nowrepresented a debt due by Mr. McNamara to the estate of his late father such that it couldnot be said that the arrangement proposed here will restore Mr. McNamara to solvency.In my view, that issue is disposed of by the production of the letter from the solicitors forthe estate confirming that no action will be taken against Mr. McNamara. Moreover, itseems to me that these monies were no more than prepayments of monies that wouldhave become payable to Mr. McNamara in due course out of his father’s estate.25. Nor do I believe that I can treat the retention of this rental money by Mr. McNamara as a“misallocation of funds” on the part of Mr. McNamara going to his bona fides or probity. Ihave already explained that, in my view, this is a matter between Mr. McNamara and theestate. The letter from the solicitors acting for the estate seems to me to put paid to thisissue. Moreover, as further noted above, the money was, in substance, a prepayment ofmoney that will become payable to Mr. McNamara in due course. In this context, it isclear that Mr. McNamara will be entitled to a significant payment from his late father’sestate in due course which will significantly exceed the total amount of the rental incomedrawn down by him.Page 15 ⇓26. I am significantly more troubled by the suggestion that there has been a failure on thepart of Mr. McNamara to make full disclosure to the court as a consequence of the failureto disclose the existence of the rental payments. As noted above, this seems to me to bea matter that ought to have been disclosed to the court. In this regard, counsel forTanager drew attention to the provisions of s. 118 of the 2012 Act. It is, of course,crucial in any process under the 2012-2015 Acts that the debtor concerned should makefull disclosure of his or her means, income, assets, and liabilities. The entire processdepends on full disclosure being made. This is reinforced by the provisions of s. 50 (3) ofthe 2012 Act which places a statutory obligation on a debtor to make full and honestdisclosure of his or her financial affairs and to ensure that, to the best of his or herknowledge, the PFS is true, accurate and complete.27. The principal obligations imposed on a debtor under s. 118 are as follows:-(a) Under s. 118 (1) a debtor is under an obligation to act in good faith and, in his orher dealings with the practitioner, is under an obligation to make full disclosure tothe practitioner of “all of his or her assets, income and liabilities and of all of thecircumstances that are reasonably likely to have a bearing on the ability of thedebtor to make payments to his or her creditors”;(b) Secondly, the debtor is under the obligation imposed by s. 118 (2) to cooperatefully in the process and to comply with any reasonable request from the practitionerto provide assistance, documents and information necessary for the prosecution ofany application under the 2012 – 2015 Acts or for the purposes of carrying out thepractitioner’s functions. This includes an obligation to provide all appropriatebusiness or other financial records;(c) Thirdly, a debtor, in respect of whom an arrangement is in effect, is under anobligation to inform the practitioner of any material change in his or hercircumstances (such as an increase or decrease in the level of assets, liabilities orincome) which would affect the debtor’s ability to make repayments under thearrangement.28. It is noteworthy that the obligation imposed by s. 118 (1) to make full disclosure is owedby the debtor in the first instance to the practitioner. It is clear from the evidence beforethe court that the practitioner was informed of the fact that rental payments had beendrawn down by Mr. McNamara from his late father’s estate. Having disclosed the matterto the practitioner, it seems to me that, subject to what I say below in relation to Mr.McNamara’s affidavit on February 2019, Mr. McNamara cannot be said to bear personalresponsibility for the failure to disclose the existence of the rental payments in his PFS.For the reasons previously explained, I am of the view that the practitioner was under anobligation to make disclosure of the issue in relation to rent at an early stage in thepresent application under s. 115A. It is unsatisfactory that the issue should only beaddressed after the discrepancy between the SFS and the PFS had been raised onaffidavit by Tanager. It is even more unsatisfactory that it was not immediatelyaddressed by the practitioner in an affidavit after the issue was first raised. In fact, thePage 16 ⇓issue was not properly addressed until after Mr. McNamara was given an opportunity toaddress the discrepancy following my judgment in August 2019.29. The consequences of non-disclosure were addressed by Baker J. in the Nugent case atparas. 52-55 as follows:-“52. It is clear from the judgment of Clarke J. in Bambrick v. Cobley that the court has adiscretion, in cases where failure to disclose has been established, as to what orderit will therefore make. The extent to which an applicant is culpable in respect of afailure to disclose is one factor and as he put it:‘a deliberate misleading of the Court is likely to weigh more heavily in favourof the discretion being exercised against the continuance of an injunctionthan an innocent omission.’Clarke J. identified that there could be intermediate cases, and one factor was theextent of materiality.53. I regard the non-disclosure in this case as being of matters which were material inthe sense in which I have explained above. I also regard the failure of full and frankdisclosure to be culpable, but in that I take my guidance from the judgment ofHogan J. in Re Belohn Limited … where he accepted that the non-disclosure hadcome about as a result of a bona fide error and oversight and that no personalblame should attach to the petitioners or their advisors, but regarded the ‘objectiverelevance and materiality’ of the matters not disclosed as being such that it wouldbe unjust to allow the order to stand. Blameworthiness, then, does not have to beestablished as personal blameworthiness, and it is to be tested objectively in thelight of the materiality of the matters not disclosed.54. I regard the PIP as blameworthy in that objective sense. Further, I am notconvinced that there was a genuine oversight on the part of the PIP, which led himnot to disclose the true picture with regard to the funding for the nursing homeschemes and the difficulty that he perceived with the proof of debt lodged byDanske.55. I accept … that I have a discretion in the order I may make as a result of a findingthat there has been material non-disclosure, and that this was culpable in theobjective sense. That discretion must take into account a desire on the part of thecourt to express its displeasure at the failure, but also must bear in mind othercircumstances which might be relevant.”30. In the following paragraphs of her judgment, Baker J. analysed the circumstances thatarose in that case and came to the conclusion that the non-disclosure there had beenboth material and culpable. In the course of so doing, Baker J. emphasised, at para. 59of her judgment that:-Page 17 ⇓“… a PIP charged with the role of engaging with the court, the creditors and the …Insolvency Service … must do so with the greatest of solemnity and candour, andhe is not in my view to see his role as being one of an advocate presenting in anadversarial system an argument in support of his client, but rather as a person whohas responsibility and obligations to all elements of the system.”31. In my view, those observations of Baker J. are of crucial importance. It is the duty of apractitioner, as an independent professional person performing a very important statutoryfunction under the 2012-2015 Acts to disclose to the court all facts relevant to the issueswhich arise for consideration under an application under s. 115A or which may bematerial in any respect to the exercise by the court of its discretion under s. 115A. AsFinlay Geoghegan J. observed (in the context of examinerships) in Re: Camden StreetInvestments Ltd [2014] IEHC 86 at para. 58:-“The Court is required to make decisions, either at a petition hearing orsubsequently on an application to confirm a scheme which may have an immediateand sometimes adverse impact on creditors, employees and others who are notpresent and not represented before the Court. The Court is absolutely dependentupon being able to rely upon petitioners, in the first instance, and thereafter,examiners and their professional advisors giving to the Court a full, frank and clearpicture with all the objectively material or potentially material facts relevant to anydecision which it is required to take, or to the exercise by it of its discretion.”(emphasis added).While those observations of Finlay Geoghegan J. were made in the context ofexaminership, they apply, in my view, with equal force in the context of proceedingsunder the 2012-2015 Acts. As I have previously observed in my judgment in Varvari[2020] IEHC 23 at para. 52:-“The court must be in a position to rely on practitioners, in the exercise of theirindependent professional role in the processes under the Acts, to place all materialfacts before the court (whether those facts tend to support or undermine the casefor relief under the Acts) so that the court can make a fully informed decision, inthe exercise of its jurisdiction under s. 115A (or any other relevant provision of the2012-2015 Acts that may be in issue in any individual case).”32. However, it seems to me that the circumstances of this case are different. Although I amof the view that the practitioner ought to have disclosed what has now been disclosed inrelation to the receipt of rent, it is clear that the practitioner (albeit erroneously) formedthe view that the rent should not be disclosed in circumstances where it was not believedto be an ongoing source of income for Mr. McNamara and his family. The practitioner alsobelieved that the rent was an asset of the estate pending distribution by the estate. Inmy view, it is understandable that these views were formed by the practitioner. He wasabsolutely correct in suggesting that the rent was an asset of the estate but, at the sametime, it is clear that Mr. McNamara was, as a matter of fact, in receipt of the rent andtherefore, the fact of its receipt should have been disclosed. I do, however, bear in mindPage 18 ⇓that it was never contemplated at the outset of the s. 115A application that it would takeso long before it was ultimately heard.33. On the other hand, I must also bear in mind that the issue as to the discrepancy betweenthe PFS and the SFS was raised in the affidavit of Ms. O’Brien sworn on behalf of Tanageras early as May 2017 and there was, in my view, an obligation on the part of thepractitioner to deal with the issue in his replying affidavit of 13th June, 2018.Surprisingly, the discrepancy between the PFS and the SFS in relation to the receipt ofrent was not addressed by the practitioner in that affidavit. The matter was, however,addressed very briefly and incompletely in the affidavit of Mr. McNamara delivered inFebruary 2019 where he said very perfunctorily that the PFS was true and accurate andthat “no actual discrepancy or incorrectness has been identified by the Objector”. Hadthe issue in relation to rent and in relation to the discrepancies between the PFS and theSFS been appropriately addressed by the practitioner and by Mr. McNamara in theresponse to Ms. O’Brien’s affidavit, it would not have been necessary for the exchange ofaffidavits subsequent to the delivery of judgment by me in August 2019 or to have twofurther hearings before the court in December 2019 and January 2020.34. In my view, the approach taken by the practitioner and by Mr. McNamara in response toMs. O’Brien’s affidavit does not reflect well on either of them. Nonetheless, I do notbelieve that it would be appropriate to dismiss the s. 115A application on this ground. Inthe first place, I am conscious that the principal issue raised by Ms. O’Brien in heraffidavit in relation to the difference between the PFS, on the one hand, and the SFS, onthe other, related to the value of the inheritance. The approach taken by the practitionerand by Mr. McNamara must be seen in that light. From their perspective, they believedthat the figure set out in the PFS was in fact accurate for the reasons set out in para. 8above. The averment made by Mr. McNamara in para. 18 of his affidavit sworn inFebruary 2019 must be seen in that context.35. Secondly, I bear in mind the considerations outlined in para. 9 above that the rent wasnot considered by the practitioner to form part of Mr. McNamara’s income. Instead, itwas considered to form part of the estate of Mr. McNamara’s late father and it wasenvisaged that it would form part of the inheritance to be made available to creditorsunder the proposed arrangement. If there had not been a delay in these proceedingsbetween 2016 and 2019, the rent would not have become a major issue. While that isnot a complete answer to the failure to disclose the receipt of rent, it is a factor to beborne in mind.36. Thirdly, in light of the evidence now before the court, I do not believe that thesustainability of the proposed arrangements is put in jeopardy by the fact that Mr.McNamara has previously used the rent in order to meet household expenses. Althoughthe rent is no longer available to Mr. McNamara, it is clear from his affidavit sworn on 4thDecember, 2019 that he has been able to make up the difference by providing music atfuneral services. Mr. McNamara will therefore have sufficient funds to discharge thefamily’s ordinary household expenses even though he will no longer have access to thePage 19 ⇓proceeds of the rents. In these circumstances, the termination of access to the rents willnot, in my view, adversely affect Mr. McNamara’s ability to discharge his householdexpenses and his ongoing obligations under the proposed arrangements and also underthe mortgage over the family home.37. Fourthly, the evidence in relation to the receipt of rent has now been put before the court.While, in my view, it should have been placed before the court at a much earlier time, ithas nonetheless been disclosed in advance of any final determination of the issue. This isa significant point of distinction between this case and the facts considered by Baker J. inthe Nugent case.38. Fifthly, I am impressed by the way in which, through the efforts of family members of Mr.and Ms. McNamara, additional funds have been provided in the sum of €28,800 which willnow be available for distribution to the unsecured creditors by means of an enhanceddividend over and above the level of dividend that was originally envisaged in thearrangement as first proposed. Having regard to all of those factors, it seems to me thatit would not be appropriate, in this case, in the exercise of my discretion, to go so far asto refuse the application under s. 115A as a consequence of the failure to disclose therelevant information in relation to rents at an earlier stage in these proceedings.Conclusion39. For the reasons outlined in para. 21, it seems to me that the discrepancies have nowbeen appropriately explained. Although, for the reasons outlined in para. 33 above, theapproach taken by Mr. McNamara and more particularly by the practitioner (who is theperson responsible for prosecuting the application under s. 115A) in their affidavits swornin advance of the hearing in May 2019 was unsatisfactory, I have come to the conclusion(for the reasons outlined in paras. 34 – 38) that the unsatisfactory nature of thisapproach should not result in the dismissal of the application under s. 115A. Subject toany further submissions that may be made by the parties, there may possibly be costsconsequences arising from the fact that these proceedings were unnecessarily prolongedas a consequence of the failure to disclose the true position in relation to rents (and toexplain the approach that had been taken in relation to rents) in advance of the hearingwhich took place in May 2019. That said, any application for costs against the practitionerwould have to surmount the significant hurdles identified in the judgment of Baker J. inMeeley (a debtor) [2019] 1 I.R. 235 and in my judgment in Varvari (a debtor)[2020] IEHC 23. I will hear the parties in due course in relation to costs.40. With regard to the three grounds of objection noted in para. 1 above, it seems to me, insummary, that:-(a) In the first place, the approach taken by Mr. McNamara in his PFS in relation to thevalue of his inheritance (other than in respect of the rent) was, in fact, correct. Itis clear from a consideration of the will of his late father (which is now before thecourt), that Mr. McNamara’s interest in his late father’s estate is subject, in the firstinstance, to payment of the specific legacies. Mr McNamara was therefore correct totake the legacies into account in putting a value in his PFS on his expectedPage 20 ⇓inheritance. He was also correct in taking account of the costs and expenses thatwould be incurred in the administration of his father’s estate. It is well settled thatall legacies are subject to the costs and expenses of the administration of theestate of the deceased. In such circumstances, it seems to me that the approachtaken by Mr. McNamara in his PFS in relation to the value of his interest in his latefather’s estate was correct. In circumstances where the rent was not an asset ofMr. McNamara and formed no part of his income, it seems to me to beunderstandable that it was not included in his PFS. That said, for the reasonsoutlined above, in circumstances where Mr McNamara was, as a matter of fact, inreceipt of rent at the time the PFS was sworn, I am of the view that it should havebeen disclosed in his PFS. To that extent, it might be said that the requirements ofs. 91 (1) (e) of the 2012 Act have not been complied with in this case. However, Itake the view, in the particular circumstances of this case, that there has beensubstantial compliance with the requirements of the subsection. In this context,having regard to the decision of the Supreme Court in Monaghan UDC v Alf-a-BetProductions Ltd [1980] ILRM 60, it is well settled that where a statutory obligationhas been substantially complied with, a failure to comply with the obligation to theletter will not constitute a breach of the obligation. In this case, it seems to me thatnot only was the failure to disclose the receipt of rent entirely understandable, itwas also insubstantial in real terms given that the rent was not, at that time, anasset to which Mr McNamara was then legally entitled. As explained above, thefailure to address the issue of the rent became more blameworthy after the issuewas raised by Ms O’Brien in her affidavit in May 2017. I have already explainedthat, at that point, there was on onus on the practitioner and Mr McNamara tomake full disclosure to the court. However, that is not a matter that arises in thecontext of s. 91. As I have already explained that is an issue which may be relevantto costs. In the particular circumstances of this case, I do not believe that it shouldresult in a dismissal of the application under s. 115A;(b) With regard to the allegation that the arrangements will not enable Tanager torecover the debts due to it to the extent that the means of Mr. McNamarareasonably permit, I am satisfied that, contrary to the contention made by Ms.O’Brien in her affidavit sworn on behalf of Tanager, the assets of Mr. McNamara andMs. McNamara have been brought to bear for the benefit of their creditors underthe proposed arrangement. As noted above, Ms. O’Brien, in her affidavit, relied onthe inconsistencies between the SFS, on the one hand, and the PFS, on the other,to suggest that full disclosure of assets had not been made by Mr. McNamara.However, for the reasons outlined above, it seems to me that the inconsistencieshave been adequately explained and there is no evidence to suggest that there areassets in existence which have not been disclosed.(c) I am also satisfied that the proposed arrangements do not unfairly prejudice theinterests of Tanager. It is very important to bear in mind in this context thatTanager will fare better under the proposed arrangements than it would in theevent of the bankruptcy of Mr. McNamara and Ms. McNamara. While, on the basisPage 21 ⇓of the SFS, it had been suggested that the assets of Mr. McNamara and Ms.McNamara had not been fully brought into account for the purposes of thearrangement, I have concluded, for the reasons set out above, that the SFS wasnot correct. There is accordingly no unfair prejudice to Tanager in approving anarrangement which is more beneficial to it than a bankruptcy and, under which, theavailable assets of Mr. McNamara are made available for the benefit of creditors.The order to be made41. Subject to confirmation that the estate of the late Mr. McNamara senior will now beadministered and the assets realised within a relatively short period, I propose to confirmthe coming into effect of the proposed arrangement both in this case and in theinterlocking proceedings involving Ms. McNamara. I will, however, postpone making aformal order to that effect pending an indication being given as to when it is expectedthat the assets of the estate of the late Mr. McNamara will be realised. It seems to me tobe important that this information should be available to the court so that the court canbe assured that the arrangement can proceed and be given effect.Dealing with the errors in the proposed arrangements42. In addition, it will be necessary in any order confirming the proposed arrangements in thiscase and in Ms. McNamara’s case to record the errors which appear in the terms of theproposed arrangements (as summarised in paras. 5 (d) and 9 (d) of my August 2019judgment). I will direct that counsel should prepare a draft order for that purpose. Thedraft order should contain appropriate recitals setting out the correct position so thatthere can be no doubt in the future as to the terms of the proposed arrangements. Whilethe court has no power under the 2012-2015 Acts to amend even obvious errors in aproposed arrangement, it seems to me, for the reasons outlined in my judgment in Taaffe(a debtor) [2018] IEHC 468 at para. 63, that there is a practical way of dealing withobvious or inconsequential errors or inaccuracies identified in a proposed arrangement.In the case of each such error, it seems to me to be obvious that an error has beenmade. It seems to me to be equally obvious that correction needs to be made to correctthe error. The correction of errors in this way is consistent with the approach taken inrelation to the correction of obvious errors in contractual documents as outlined in thejudgment of Clarke J. (as he then was) in Mooreview Developments Ltd v. First Active Plc[2010] IEHC 275 at paras. 3.5 to 3.6 and by Haughton J. in Knockacummer Wind FarmLtd v. Cremins [2016] IEHC 95.
Result: The proposed arrangement was confirmed subject to confirmation that the estate of the debtor’s father would be realised promptly.