PIA Terms
Personal Insolvency Acts 2012-2015 v Lowe (A Debtor)
[2020] IEHC 104 (02 March 2020)
JUDGMENT of Mr. Justice Denis McDonald delivered on 2 March, 20201. The issue addressed in this judgment relates to the lawfulness (or otherwise) of apersonal insolvency arrangement which proposes what is colloquially known as a debt forequity swap. Under the personal insolvency arrangement proposed in this case by thepersonal insolvency practitioner (“the practitioner”) on behalf of the above named debtor,Ms. Lowe, the amount due (currently in excess of €358,000) on foot of the mortgage loanowed by Ms. Lowe to the Governor and Company of the Bank of Ireland (“the bank”)would be deemed to be €300,000 (which is the agreed market value of the family homeof Ms. Lowe). Repayment would then be effected as follows:-(a) An “active part” (comprising €170,000.00) would be repaid by regular instalmentsof principal and interest;(b) A debt for equity swap would be effected in respect of the balance of €130,000.00.This is intended to give the bank an interest in the family home of Ms. Lowe (whichis her principal private residence for the purposes of s. 115A of the PersonalInsolvency Act, 2012). According to the proposed arrangement, the bank willassume a “43.3% equity share in the house”. As I understand it, €130,000represents 43.33% of the sum of €300,000.Relevant facts2. The question in issue arises in the context of an appeal brought by the practitioner froman order of the Circuit Court made on 14th February, 2019 under which the Circuit Courtrefused the practitioner’s application for an order pursuant to s. 115A of the 2012 Actconfirming the coming into effect of the proposed arrangement.3. The arrangement in question was proposed by the practitioner in 2017. A meeting ofcreditors took place on 4th August, 2017. A majority of creditors representing 95.40% invalue of Ms. Lowe’s total indebtedness voted against the proposed arrangement while onecreditor representing 4.60% of Ms. Lowe’s overall indebtedness voted in favour. Thepractitioner argues that the latter should be regarded as a separate class of creditors forthe purposes of s. 115A(9)(g) and (17).4. Ms. Lowe has a total indebtedness of €561,685.33. The bulk of her indebtedness is to thebank in respect of a number of loans which are secured by way of mortgage over herfamily home where she resides with her partner (who is jointly indebted to the bank withher) and three children. The current market value of the family home is €300,000 whilethe amount due to the bank in respect of two loan accounts secured on the property is€358,502.56 (together with a further sum of €9,913.00 which is secured by way ofPage 2 ⇓judgment mortgage). In March 2016, the bank issued proceedings in the Circuit Courtseeking possession of the property. However, those proceedings were adjourned pendingthe outcome of the process under the 2012-2015 Acts.5. If confirmed by the court, the arrangement in this case would be for one year. As notedabove, the arrangement proposes that the debt of €358,502.56 would be written down tothe value of the family home namely €300,000. Under s. 103 (2) of the 2012 Act, thearrangement could not lawfully propose a reduction in the amount owed to the bankbelow the value of the family home – namely €300,000. The remaining element of themortgage loan in the sum of €58,461.56 will be written off and rank as an unsecured debtin the arrangement. It is important to note that, although the practitioner has made thecase that the mortgage loan is to be reduced to €300,000, the only element of that sumthat will be treated as a live mortgage balance is the sum of €170,000 which would berepaid by instalments of principal and interest over the remaining term of the mortgage.On the basis of the material before the court, it appears that Ms. Lowe would not be in aposition to service payments of a loan for more than €170,000.6. In light of the fact that the arrangement proposes that only €170,000.00 would betreated as a “live” balance to be repaid by instalments, the practitioner proposes toaddress the remaining indebtedness of €130,000.00 by swapping that debt for an “equityshare” in the property ostensibly in accordance with s. 102 (6) (f) of the 2012 Act. Theway in which this is to occur is expressed in a number of different ways in the proposedarrangement. For example, in the executive summary on p. 6 (repeated in largely similarterms on p. 15 of the proposed arrangement), the “debt for equity” swap is described inthe following terms:-“The mortgage of the principal private residence will be restructured as follows.The new live mortgage balance will be €170,000. A further €130,000 of the Bank’sdebt will be swapped for an equity share in the property as provided for in Section102 (6) (f) …. The CMV per the … Practitioner’s best information is €300,000 andtherefore the Bank will assume a 43.3% equity share in the house. The remainingamount of the current mortgage of €58,461.56 will be written off and rank as anunsecured debt in this arrangement. The live balance of €170,000 will be paid on afull capital and interest basis at a fixed rate of 2.25% over 25 years of the entiremortgage at a par value of €130,000. Should this option not be exercised duringthe 25 year duration of the mortgage then this option will cease to exist. Thesecured creditor will only be able to exercise its equity share vis a vis a salefollowing the death of the debtor providing the terms of the restructured mortgageare adhered to by the debtor….”7. During the course of the hearing, it was acknowledged by the practitioner (through hiscounsel) that it was unfair to the bank to give the debtor an option during the term of themortgage, to repurchase, at a par value of €130,000, the “equity” which, under theproposed arrangement, would be “owned” by the bank. This is in circumstances wherethe value of the property may well increase over the remaining 22 years of the mortgagePage 3 ⇓term in which case the value of the “equity” owned by the bank might be worth morethan €130,000 at the time the option is exercised. Yet, all Ms. Lowe would have to pay insuch event would be €130,000. This would be so even if the value of the property hadincreased significantly in the intervening period. In those circumstances, as the writtensubmissions on behalf of the practitioner made clear, it was proposed that a written andlegally binding commitment would be given by Ms. Lowe to waive her right under theproposed arrangement to acquire the bank’s “equity” in the property at a par value of€130,000. However, the bank, in the course of the hearing, made clear that it does notaccept that a practitioner is entitled to make a modification in this way after thearrangement has been presented to the creditors of Ms Lowe and voted on by hercreditors. The bank draws attention to the fact that, on the hearing of an application toconfirm a proposed arrangement, neither the court nor a practitioner is given any powerto modify or alter the arrangement previously placed before the creditors of the debtor fortheir approval. For completeness, it should be noted that there are provisions in the Actswhich permit variations to be made to an arrangement but those provisions only applywhere an arrangement has previously come into effect.8. The treatment of secured debt is further addressed in Appendix 1 to the arrangement.One of the curious features of this arrangement is that, while Appendix 1 provides thatthe “equity part” is to be “repaid” on or before June 2039, the method by which this is tobe repaid is not spelt out. Furthermore, no date in June 2039 is identified for thispurpose. In addition, notwithstanding the reference on p. 1 of Appendix 1 to repaymentbeing made in June 2039, p. 2 of the same Appendix has the notation “N/A” opposite the“repayment due date” for the “equity part” of the loan and the same notation appearsopposite the entry for “mortgage loan expiry date at the end of the arrangement”.9. It is also clear from Appendix 1 to the arrangement that no interest will be paid on the“equity part” of the loan. This is consistent with the intention underlying the arrangementin its unmodified form that, on or before June 2039, Ms. Lowe would be entitled to buyback the equity held by the bank at par value. This provision in respect of interest wouldclearly give rise to the same concern about fairness as the provision set out on p. 6 (andrepeated on p. 15) that Ms. Lowe would have the option during the currency of the loanto repurchase the bank’s “equity” at a par value of €130,000.10. The impression created by Appendix 1 that Ms. Lowe will be entitled to buy back, at parthe “equity “owned by the bank is reinforced by the statement in the same Appendix thatthe interest rate on the “equity part” of the loan will be 0.00%. Notwithstanding what isstated in Appendix 1, the practitioner, in his affidavit grounding the application under s.115A, has suggested that the bank will get the benefit of the increase in value of its“equity” in the property at the end of the mortgage term. In paras. 15-16 of his affidavitsworn on 20th June, 2018, the practitioner says:-“15. I say for the avoidance of any doubt that the exchange of 36.26% (€130,000) ofthe mortgage debt is offset by the debtor giving the creditor a 43.3% share in theownership of the property. I say and believe that it is likely that the Creditor’sPage 4 ⇓ownership of the 43.33% share of the property would increase over time in linewith capital appreciation, and thus give the Creditor a higher and more beneficialreturn in due course….16. I say and believe there [is] not a simple ‘write-down’ in this PIA…for the SecuredCreditor and the Objector is incorrectly categorising the exchange of a 43.33%equity share as same. I say and believe that based on the current market value ofthe Principal Private Residence of €300,000 the Creditor’s ownership will be€130,000 and as set [out] above even based on a modest 2% capital appreciationto age 82 (in accordance with CSO figures) it is anticipated that this increase willrelease a return to the Creditor in the sum of €254,887.88 …”.11. I find it difficult to identify any provisions in the proposed arrangement which clearly setout the bank’s rights in these terms. Moreover, the only circumstance in which thearrangement appears to envisage that the bank might be entitled to realise the value ofthe “equity part” is on the death of Ms. Lowe (assuming that she has not decided to buyback the “equity part” at par either during the currency of the mortgage loan orimmediately before the expiry of the term of the mortgage loan). This seems to me tofollow from the last sentence of the extract from p. 6 of the proposed arrangementquoted in para. 6 above. It is difficult to reconcile some of the aspects of thearrangement as described in Appendix 1, on the one hand, with the description of thearrangement on p.p. 6 and 15, on the other. However, doing the best I can, myunderstanding of the arrangement is that Ms. Lowe would have the right to buy back the“equity share” from the bank at any time prior to the expiry of the mortgage term in 2039but that, if she did not do so within that time, she would lose the right to do so thereafter.Conversely the bank would not be entitled to realise its interest in the “equity share” untilMs. Lowe died at which stage they would be entitled to 43.3% of the proceeds of sale ofthe property following her death. There is, however, no detail in the proposedarrangement as to how the property is to be sold after the death of Ms. Lowe. Thus, forexample, there is no provision dealing with who should have conduct of the sale. Nor isthere any provision dealing with the mode of sale (whether by private treaty or publicauction) and there is likewise no provision dealing with the carrying out of any valuationprior to sale. It is unsurprising, in these circumstances, that, in the course of the hearingbefore me, counsel for the bank strongly criticised the lack of specificity in the proposedarrangement in relation to how the respective rights of Ms. Lowe and the bank are to beregulated and managed under the proposed arrangement.The submissions of counsel for the practitioner12. Counsel for the practitioner has argued that, in fact, the “debt for equity” element of theproposed arrangement is a sensible and practical way to deal with the difficulty thatarises where, on the basis of a debtor’s current financial circumstances, repayment of themortgage loan (even where it is reduced to the value of the underlying security) isunaffordable to the debtor. One of the solutions which is sometimes mooted in suchcircumstances is that the mortgage debt should be split as between a “live” debt and a“warehoused” balance. In such cases, payment of the warehoused amount is postponedPage 5 ⇓until the expiry of the term of the mortgage. In the meantime, the debtor will berequired to service the “live” element of the debt. However, as counsel for thepractitioner highlighted, such an arrangement can be extremely problematic in practice incircumstances where the debtor may not have the means, at the end of the mortgageterm, to pay the warehoused amount. Such an arrangement therefore has the potentialto leave the debtor insolvent at the end of the mortgage term. Thus, an arrangement ofthat kind will often be self-defeating and inconsistent with the purpose of the 2012-2015Acts which, as recorded in the long title, were intended (inter alia) to enable insolventdebtors to resolve their indebtedness in an orderly and rational manner and withoutrecourse to bankruptcy. While Baker J., in Paula Callaghan [2018] 1 I.R. 335 acceptedthat warehousing of this kind was not precluded under the 2012-2015 Acts, she madeclear that such an arrangement would only be suitable in circumstances where there is aproper basis to believe that the debtor concerned would be in a position to pay thewarehoused amount at the time of expiry of the mortgage. In that case, the relevantwarehousing suggestion was in fact made by way of counterproposal by the objectingcreditor. In para. 81 of her judgment, Baker J. explained why the counterproposal wasnot appropriate. In that para. she said:-“It is crucial in this context that s. 90 precludes a debtor entering into more thanone personal insolvency arrangement in his or her lifetime. This means that thelegislation envisages an arrangement which will deal with all present insolvency ofthe debtors or at least the achieving of solvency within five years. While thecounterproposal made by KBC may seem attractive and to some extent benevolent,it is capable of creating circumstances amounting to insolvency at the end of themortgage term in approximately 23 years’ time. Because a PIA is a once in alifetime solution it would be wrong to test the reasonableness of a proposal in thelight of a preferred solution or counterproposal that could on its terms result ininsolvency at a future date…. A warehousing solution should on present or knownfigures offer a solution to indebtedness that is likely to be achieved. Neither of thedebtors has the benefit of a pension which might provide a lump sum on retirementto deal with the warehoused amount. The repayment of the inactive accounttherefore is not predicated on any anticipated ability to pay in the future, and isentirely on the hazard. This results in unfairness at a level which I considermaterial.”13. Counsel for the practitioner argued that, in contrast, the “debt for equity” solutionprovides significant benefits in cases where a debtor does not have the means to servicerepayment of the mortgage debt (even where it is reduced to the market value of theunderlying security). In such cases, the debt can be split between an affordable tranche(which will be repaid by monthly instalments) and an unaffordable tranche which will beswapped for a share of the secured property. In such cases, the difficulty identified abovein relation to warehousing does not arise. This is for the simple reason that no debtbecomes due at the end of the mortgage term. Instead, counsel submitted that thecreditor gets the benefit of an interest in the property which is likely to increase in valuePage 6 ⇓over time such that the creditor will achieve an uplift when the property is ultimately soldafter the death of the debtor.14. Counsel for the practitioner submitted that an arrangement of this kind is consistent withone of the purposes of the 2012-2015 Acts which is to enable a debtor to remain in his orher family home. Counsel referred, in this context, to the provisions of s. 99 (2) (h)which makes clear that an arrangement: “shall not require that the debtor dispose of hisor her interest in the debtor’s principal private residence or to cease to occupy suchresidence unless the provisions of s. 104 (3) applies”.15. Counsel for the practitioner argued that, under the arrangement proposed here, Ms. Lowewill dispose of some of her ownership rights in her family home but, crucially, will remainin occupation of her home. The practitioner also submits that, in accordance with s. 102(6) (f), one of the methods of dealing with secured debt expressly available to apractitioner is a “debt for equity” swap. Insofar as relevant, s. 102 (6) provides asfollows:-“(6) Without prejudice to the generality of section 100 or subsections (1) to (3) andsubject to sections 103 to 105, a Personal Insolvency Arrangement may include oneor more of the following terms in relation to … secured debt:(a) …(f) that the principal sum due on the secured debt be reduced provided that thesecured creditor be granted a share in the debtor’s equity in the property thesubject of the security”.16. In making this submission in relation to s. 102 (6) (f), counsel for the practitioner hasargued that the word “equity” in the subsection must mean ownership. Counsel arguedthat “equity” is not defined in the 2012 Act and that the concept of negative equity “goesto value not ownership of security”. This argument is made circumstances where it isclear, having regard to the extent of the debt owed to the bank by Ms. Lowe, that thevalue of her family home is far outweighed by the extent of the debt such that she is nowin what is known colloquially as “negative equity”.The submissions on behalf of the bank and KBC17. Detailed written and oral submissions were made by counsel on behalf of the bank whichI summarise below. In addition, I heard submissions from counsel on behalf of KBC Bank(Ireland) Plc (“KBC”) in relation to the interpretation of the relevant provisions of the2012 Act (as amended). I did so in circumstances where the present case was specificallylisted for hearing together with a similar appeal in the case of Anthony Mooney (a debtor)for the same day in which KBC was involved. Both cases were specifically listed to beheard together in circumstances where both of them involved issues in relation to thevalidity of arrangements which proposed “debt for equity” swaps. Both cases wereselected with a view to hearing detailed argument from the practitioners, on the one side,and the objecting creditors, on the other, with a view to the court providing a writtenPage 7 ⇓judgment on the issue. KBC was the objecting creditor in Mr. Mooney’s case.Furthermore, in his case, distinguished conveyancing experts had provided reports onbehalf of both KBC and the practitioner acting on behalf of Mr. Mooney. Mr. RoryO’Donnell had been retained on behalf of KBC while Ms. Michelle Linnane had beenretained on behalf of the practitioner acting in that case. The hearing was initially fixedfor two days in October 2019 but was adjourned in circumstances where the practitionerin the Mooney case required authorisation from the Legal Aid Board to retain Ms Linnaneas an expert. Once that authorisation was forthcoming, the hearing was then scheduled tocommence on Thursday 19th December, 2019. That hearing date was fixed long inadvance. Regrettably, the appeal brought by Mr. Mooney was withdrawn very soon priorto the hearing date. This occurred on Monday 16th December, 2019. The Mooney casewould never have been selected as a test case if I had known that there was to be anyrisk that the appeal would be withdrawn. In those very particular circumstances, infairness to KBC (who had invested very considerable effort in the preparation of thatcase), and in light of the wider repercussions of any judgment on the “debt for equity”issue, I gave liberty (without objection from the practitioner in this case) to KBC toaddress me on the interpretation of the 2012 Act. The submissions of counsel wereconfined to that issue. In circumstances where KBC was not a party to Ms. Lowe’sappeal, it would obviously not have been appropriate for KBC to make any submissions inrelation to the substance of the appeal in Ms. Lowe’s case. It would also have beeninappropriate to have regard in Ms. Lowe’s case to any of the evidence in Mr. Mooney’scase which, unfortunately, meant that the expert reports of Mr. O’Donnell and Ms.Linnane were no longer available for consideration by the court.18. The application under s. 115A was opposed by the bank on a number of grounds:-(a) In the first place, the bank argued that, on a proper interpretation of the 2012-2015 Acts, a “debt for equity” swap could only take place with the consent of therelevant secured creditor. This was also the focus of the submission made bycounsel on behalf of KBC;(b) The bank also argued that a “debt for equity” swap can only take place where thedebtor has some equity (i.e. positive equity) in the secured property. In the presentcase, Ms. Lowe has no such equity;(c) The bank submitted that the proposed arrangement is contrary to s. 103 (2) of the2012 Act in that, in substance, the arrangement proposes a reduction of theprincipal sum due on foot of the mortgage to less than the value of the family homeover which the bank holds security;(d) Far from getting any interest in the property, the bank argued that, under theproposed arrangement, it will get no more than the “hope value” of the propertybased on the hope that the value of the property will increase in the future.Page 8 ⇓(e) The bank also made the case that the proposed arrangement is inherently unfairand that, accordingly, the requirements of s115A(9)(e) and (f) cannot be satisfiedin this case;(f) As noted above, the bank also contended that the proposed arrangement isunworkable and fails to spell out all of the details. For example, the proposedarrangement does not address issues such as the insurance of the property or themaintenance of the property;(g) Having regard to Ms. Lowe’s financial circumstances, the bank submits that thearrangement is, in any event, unsustainable.19. To the extent that it is necessary to do so, I now deal, in turn, with each of the issuesidentified in para. 18 above. However, some of those issues may become mootdepending on the conclusion which I reach in relation to the questions relating tostatutory interpretation. It may therefore not be appropriate to deal with all of the issuescanvassed by the bank. On the other hand, if I decide those issues against the bank, itwill be necessary to consider the entire of the requirements of s. 115A and consider, inparticular, whether, on the evidence before the court, those requirements have beensatisfied in this case.Is the consent of the secured creditor required?20. As Baker J. emphasised in Paula Callaghan at p. 345, secured debt is given specialstatutory protection in a variety of respects under the 2012-2015 Acts. These protectionsare to be found in a number of statutory provisions of which the most important is s. 103which contains very detailed and comprehensive provisions in relation to the position of asecured creditor. In particular, the section makes very clear that the principal sumsecured in favour of the secured creditor over the relevant secured property cannot bereduced, under the terms of a proposed arrangement, to a sum less than the marketvalue of the property. In turn, there are detailed provisions in s. 105 as to how themarket value of the secured property is to be assessed. Section 105 envisages that,where possible, the valuation of the security will be agreed between the practitioner andthe secured creditor concerned. However, s. 105(3) provides that, in the absence ofagreement, an appropriate expert will be appointed by the practitioner, the debtor andthe relevant secured creditors. In the event that the practitioner, the debtor and securedcreditor are unable to agree on the identity of an independent expert, the issue may bereferred by any of them to the Insolvency Service of Ireland (“ISI”) and it will be for theISI to appoint an appropriate independent expert to determine the market value. Section105(5) sets out the matters to be taken into account in carrying out a valuation of thesecured property and s. 105(6) contains a definition of “market value”. In turn, s. 105(6)provides that the market value of property (the subject of security for a secured debt)equates to the price which that property might reasonably be expected to fetch on a salein the open market.21. As noted above, s. 103 is the key provision insofar as the protection of a secured creditoris concerned. Section 103(1) provides that, in cases where the relevant arrangementPage 9 ⇓proposes a disposal of property which is the subject of security, the amount to be paid tothe secured creditor under the arrangement must amount, at least, to the value of thesecurity determined in accordance with s. 105 or the amount of the secured debt as ofthe date of issue of the protective certificate (whichever is the lesser). The relevant textof s. 103(1) is set out in para. 23 below.22. In turn, s. 103(2) deals with the position of a secured creditor in cases where the relevantproperty, the subject of the security, is to be retained under the arrangement and it isalso proposed to reduce the principal sum due to the secured creditor. The precise termsof s. 103(2) are set out in para. 26 below. The effect of the subs. is that, in casesgoverned by it, the amount of the principal sum may not be reduced below the value ofthe security determined in accordance with s. 105.23. Section 103(1) provides as follows:“(1) A Personal Insolvency Arrangement which includes terms providing for the sale orother disposal of the property the subject of the security shall, unless the relevantsecured creditor agrees otherwise, include a term providing that the amount to bepaid to the secured creditor shall amount at least to —(a) the value of the security determined in accordance with section 105; or(b) the amount of the debt (including principal, interest and arrears) secured bythe security as of the date of the issue of the protective certificate,whichever is the lesser.”24. It was submitted at the hearing by counsel for the bank and counsel for KBC that the useof the word “shall” in s. 103(1) is truly mandatory. In this context, the courts haverecognised that the use of the word “shall” will not always be construed as imposing amandatory statutory requirement. The relevant principle was explained as follows byHenchy J. in the Supreme Court in the State (Elm Developments Ltd) v. Monaghan Co.Council [1981] ILRM 108 at p. 110 where he said:“Whether a provision in a statute …, which on the face it is obligatory (for example,by the use of the word ‘shall’), should be treated by the courts as truly mandatoryor merely directory depends on the statutory scheme as a whole and the partplayed in that scheme by the provision in question. If the requirement … may fairlybe said to be an integral and indispensable part of the statutory intendment, thecourts 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 adirection which is not of the substance of the aim and scheme of the statute, non-compliance may be excused.”25. In my view, the provisions of s. 103(1) are clearly an integral and indispensable part ofthe statutory scheme established by the 2012-2015 Acts. The provisions are thereforemandatory such that there is no scope to excuse any failure to comply with them. It isPage 10 ⇓clear from the terms of s. 103(1) (both, when read on their own and when read in thecontext of the remaining sub-sections within s. 103) that the provision was enacted bythe Oireachtas in order to guarantee a minimum level of protection for a secured creditorand, in particular, to ensure that, where an arrangement proposes that property thesubject of security should be sold, the secured creditor will be paid, at least, the marketvalue of the property in question (or the amount of the debt if less than the value of theproperty). The Oireachtas, in enacting s. 103, was plainly concerned to ensure that theproperty rights of secured creditors would be respected. In my view, the protectionavailable under s. 103(1) would be illusory if practitioners, in formulating arrangements,were free to depart from the requirements set out in the subsection. That would make anonsense of the subsection. Accordingly, I cannot see any basis on which s. 103(1) couldbe construed as merely directory rather than obligatory.26. Very similar language is used in s. 103(2) such that it, too must be construed as amandatory obligation rather than as a directory or aspirational provision. Section 103(2)is in the following terms:“(2) A Personal Insolvency Arrangement which includes terms providing for —(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 tothat secured creditor to a specified amount,shall not, unless the relevant secured creditor agrees otherwise, specify the amountof the reduced principal sum referred to in paragraph (b) at an amount less thanthe value of the security determined in accordance with section 105.”27. To my mind, for similar reasons to those set out above in relation to s.103(1), s. 103(2)can only be read as imposing a mandatory obligation. The subsection makes very clearthat the principal sum cannot be written down to less than market value without theconsent of the secured creditor concerned. The requirement of consent would bemeaningless if the subsection was to be interpreted as being merely directory oraspirational. It is therefore clear that, in cases where, as here, the arrangement proposesboth a reduction of the principal sum and the retention of the family home (over whichthe security is held) the principal sum may not be reduced to less than the market valueof the property determined in accordance with s. 105. There is no dispute in the presentcase that, for this purpose, the market value of the property is €300,000. Thepractitioner maintains that the principal sum has not been reduced below this figure of€300,000. However, the bank argues that it has, in fact, been reduced to €170,000.Counsel for the bank argued that this is the only sum that the arrangement envisages willbe repaid to the bank. While the arrangement proposes that the bank will be given aninterest in the property, the bank argues that there is no guarantee that the bank willever recover €130,000. As noted above, the bank characterises the “equity” in theproperty as no more than “hope value”. In particular, the bank argues that, if the valuePage 11 ⇓of the property were to fall, the bank could receive considerably less than €130,000 andwould have no recourse to Ms. Lowe or her estate for the balance.28. The bank submits that it is a fallacy to suggest that the principal sum has not beenwritten down below €300,000. On the contrary, the bank submits that it is manifest that,under the arrangement proposed by the practitioner in this case, the principal sum hasbeen reduced to €170,000. That is the only sum that Ms. Lowe will be required to repayover the remaining term of the mortgage. With regard to the argument made by thepractitioner that the value of “equity share” (currently valued at €130,000) should betaken into account, the bank argues that there is no scope to interpret the words“principal sum” in s. 103(1) and s. 103(2) as including anything other than a money sum.The bank submits that “principal sum” cannot be construed as extending to a payment inkind or the provision of some form of compensation (such as an interest in land).29. The bank also draws attention to the language used in the arrangement itself which thebank suggests constitutes a clear acknowledgement by the practitioner that thearrangement proposes a reduction of the principal sum to €170,000 (which is obviouslyless than the market value of the property). On p. 6 and again on p. 15 the followingstatement appears:“The new live mortgage balance would be €170,000. A further €130,000 of theBank’s debt will be swapped for an equity share in the property …”.30. Counsel for the bank submitted that this statement in the proposed arrangement makesits crystal clear that the principal sum is being reduced to €170,000. Counsel argued thatthis was a clear breach of the provisions of s. 103(2)(b) of the 2012 Act in circumstanceswhere the market value of the property is €300,000. Counsel submitted that, absentconsent of the bank, this was manifestly impermissible under the 2012 Act.31. On behalf of the practitioner, it was submitted that the arrangement is in fact consistentwith s. 103(2) in circumstances where the arrangement envisages that, in addition torepayment of €170,000, the bank is to receive a 43.3% interest in the family homewhich, on the basis of the current market value of €300,000, equates in value to€130,000. The practitioner contends that, in that way, the proposed arrangementconforms to the requirements of s. 103(2) in that the entire of the market value of€300,000 is accounted for.32. I can see that it might be argued, notwithstanding the terms of the arrangement quotedin para. 29 above that, in substance, the principal sum has been reduced to €300,000, ofwhich €170,000 will be paid by instalments and of which €130,000 will be satisfied by thegrant of an equity interest in the family home. It might thus be argued that the principalsum has not been reduced to less than the current market value of the home. However,while such arguments may appear to have some superficial attraction, I do not believethat they withstand any serious level of scrutiny. In this context, it is important to keepin mind the language used in s. 103(2) which speaks of “a reduction of the principal sumdue in respect of the secured debt due to that secured creditor to a specified amount”Page 12 ⇓(emphasis added). Those words clearly envisage that, in any arrangement to which s.103(2) applies, a precise figure will be given for the reduced principal sum. While thereason for requiring this to be done is not spelt out in s. 103(2), the rationale seemsclear. The secured creditor needs to know the precise amount of the reduction so that itcan assess whether the reduced principal sum, at the very least, matches the value of theunderlying property. Equally, the relevant debtor and secured creditor need to know whatis the amount that will have to be paid by the debtor to the secured creditor subsequentto confirmation of the proposed arrangement. It is crucial, if the debtor is to be returnedto solvency, that the arrangement should expressly identify the amount of the ongoingliability on the part of the debtor and that it should address how that amount is to berepaid. In the usual way, this will be done in one or more of the ways set out in s.102(6). It will be essential, in due course, to consider the specific provisions of s.102(6)(f). However, the most common way in which an arrangement addressesrepayment of the principal sum due on foot of a secured debt is to specify an amount thatwill be paid on a monthly basis to ensure that, based on current interest rates, theprincipal sum together with accrued interest, will be paid over the course of the mortgageterm specified in the arrangement. In order that a practitioner will be in a position todraft an arrangement on that basis and in order that the debtor will be in a position toknow what payments are to be made, it is critically important that the precise amount ofthe principal money to be repaid should be specified.33. I do not believe that one can plausibly treat the amount of principal due under thearrangement proposed here as being €300,000 rather than €170,000. This is for thesimple reason that, while the element represented by the “equity” to be given to the bankunder the arrangement may have had a value of €130,000 at a particular point in time,that value will fluctuate with the highs and lows of the property market. This makes itimpossible to say, at any given moment, what is the principal sum specified for thepurposes of the arrangement. Accordingly, I cannot see how it can be said that theprincipal sum has been reduced to a specified amount for the purposes of s.103 (2).Furthermore, even if one could overcome that difficulty, the fact remains that, if the valueof the property were to fall, the principal sum could no longer be said to be specified at€300,000 but would, in truth, be less than that. This would entirely undermine the clearobject and purpose of s. 103(2) which is to ensure that a secured creditor will, atminimum, be assured that, in any arrangement proposed under the 2012 – 2015 Acts,the secured debt will not be reduced below the market value of the underlying security(as valued in accordance with s. 105).34. In the circumstances, it seems to me to follow that one could not properly conclude forthe purposes of s. 103 (2) that the reduction in value of the principal debt here wasspecified at €300,000. The reality is that the principal sum has been reduced to€170,000. That is the sum which, under the terms of the proposed arrangement, Ms.Lowe will be required to repay by instalments over the remaining term of the mortgage.The fact that the arrangement provides some other form of value to the bank does not, inmy view, alter the fact that the principal sum has been reduced to €170,000. It seems tome that the reduction in principal occurs even where compensation is also provided to thePage 13 ⇓secured creditor under the terms of the arrangement in the form of an equity share. Byits very nature that “equity share” will fluctuate in value.35. In circumstances where the principal sum has been reduced below the market value ofthe family home (assessed in accordance with s. 105), the proposed arrangement cannotbe confirmed in the absence of consent of the bank or in the absence of some otherprovision of the 2012- 2015 Acts which permits an arrangement of this kind. It istherefore necessary to consider whether there is some other provision of the Acts thatwould permit the practitioner to proceed in the manner proposed here.Is the proposed arrangement within s. 102 (6) (f) ?36. In the present case, the practitioner relies on s. 102 (6) (f) which he submits expresslypermits an arrangement of the kind proposed. Section 102 (6) sets out a non-exhaustivelist of ways in which secured debt may be addressed under a personal insolvencyarrangement. Section 102(6) (f) provides as follows:“(6) Without prejudice to the generality of section 100 or subsections (1) to (3) andsubject to sections 103 to 105, a Personal Insolvency Arrangement may include oneor more of the following terms in relation to the secured debt:(a) …(f) that the principal sum due on the secured debt be reduced provided that thesecured creditor be granted a share in the debtor’s equity in the property thesubject of the security”.37. The first point to note about s. 102(6) (f) is that, consistent with the view which I haveformed about the interpretation of s. 103(2), it clearly contemplates that the share of adebtor’s equity to be given to the secured creditor is not treated as part of the reducedprincipal sum. On the contrary, the granting of a share in the debtor’s “equity” is treatedas the quid pro quo for the reduction in the principal sum.38. Secondly, and crucially, it is clear from the opening words of s. 102(6) that the provisionswhich follow (including para. (f)) are expressly made subject to ss. 103-105. This meansthat the provisions of s. 102(6) (f) are subject to s. 103(2). Accordingly, it follows thatany reduction in the principal sum due in respect of secured debt (on the basis that therelevant secured creditor will be granted a share in the debtor’s equity in the securedproperty) cannot be set at a figure less than the market value of the secured propertywithout the consent of the relevant secured creditor. When one takes account of thelanguage of s. 102(6) and in particular the words “subject to sections 103 to 105”, it isnot possible, to my mind, to construe s. 102(6) (f) as overriding or in any way takingprecedence over the requirements of s. 103(2). On the contrary, the Oireachtas, inenacting the 2012 Act, was careful to make it clear, for the purposes of the protection ofsecured creditors, that the different methodologies available under s. 102(6) could not beused to override or displace the protection afforded under s. 103 which guarantees that,at the very least, the principal sum due on foot of a secured loan will not be reduced,Page 14 ⇓under any arrangement proposed under the 2012 – 2015 Acts, below the market value ofthe secured property.39. I therefore believe that it is clear that s. 102 (6) (f) does not authorise a reduction in theprincipal sum beneath the market value of the secured property. Accordingly, it followsthat the consent of the secured creditor (in this case the Bank) is required before apractitioner can formulate a proposal for a personal insolvency arrangement under whichit is envisaged that the principal sum due to a secured creditor will be reduced below themarket value of the property (and where the secured creditor is given, instead, an“equity” in the property of the debtor).In the absence of bank consent, the “debt for equity” proposal is not capable of beingconfirmed under s 115A40. In the present case, the bank has not consented to the proposed treatment of the debtdue by Ms. Lowe to it on foot of the mortgage loans secured over her family home. Incircumstances where the proposal involves a reduction of the principal sum to a figureless than the value of the family home, the consent of the bank would be required beforeany such proposal could be confirmed by the court. It is clear that the consent of thebank will not be forthcoming and, in those circumstances, there is no basis upon which Icould make an order pursuant to s. 115A (9) confirming the coming into effect of theproposed arrangement. The court is given no discretion under s. 115A to override therequirements of s. 103(2). On the contrary, the court is not permitted to even consideran application under s. 115A (9) unless it is satisfied that the mandatory requirementsreferred to in s. 99 have been complied with. Section 115A (8)(a) (ii) makes this veryclear. One of the requirements of s. 99 of the 2012 Act is contained in s. 99(2)(k) underwhich an arrangement is required to make provision for the manner in which security heldby a secured creditor is to be treated and this requirement is expressly made subject toss. 102 – 105 of the 2012 Act. Having regard to the fact that the arrangement proposedhere does not comply with s. 103(2) I am not permitted under s. 115A (8)(a) (ii) to evenconsider the application that is made under s. 115A (9).Other issues41. As noted in para. 17 above, there were a significant number of other argumentscanvassed during the course of the hearing on behalf of the bank. In light of theconclusion which I have reached in para. 40 above I do not believe that it would beappropriate for me to address these issues in any detail. In particular, I do not believethat I should address any of the issues which would ordinarily fall to be considered unders.115A (9) on an application of this kind. In circumstances where the gatewayrequirements in s.115A (8) of the 2012 Act have not been complied with, the court isenjoined from any consideration of those issues.42. It may, nonetheless, be helpful to address, at least to some extent, the argument madeby the bank that a ‘debt for equity’ swap can only take place where the debtor has someequity (i.e. positive equity) in the secured property. That is an issue which arises as amatter of principle and can be considered independently of the issues that would ariseunder s.115A (9). I stress that anything I say on this issue is purely obiter.Page 15 ⇓43. As recorded in para. 16 above, counsel for the practitioner has argued that the word‘equity’ as used in s.102(6)(f) should be interpreted as meaning ownership. Counsel wasconstrained to make that argument in circumstances where, on the facts of this case, it isclear that the debt due to the bank exceeds the value of the family home. The difficultywith this argument is that it is contrary to the ordinary meaning of the word ‘equity’ whichis concerned not with legal ownership but with the extent of the value held by the legalowner in property which is subject to a mortgage. This is very clearly explained by Wyliein ‘Irish Land Law’, 5th Edition at para. 12.05 as follows: -“While at common law the mortgagee was regarded as owner of the property, inequity the mortgagor is regarded as owner and the mortgagee as an incumbranceronly. This equity of redemption, sometimes rather loosely referred to as themortgagor’s ‘equity’ in the property, is a valuable interest in property which can besold, demised or mortgaged, like any other item of property. Furthermore, it isusually quite easy to put a monetary value upon it, especially in former days ofrising property values in Dublin. The figures used here for illustration purposes areprobably unrealistic at the time of writing because of the recent property slumpstemming from the banking crisis, but they will serve to make the point. Forexample, if in 2000 X bought a house for €300,000 and borrowed €250,000 from abank…to help pay for it, he immediately had an equity in the house of about€50,000 in value. By 2005 the market value of the house might have risen to€500,000, so that by then X had an asset worth €500,000 in respect of the whichthe liabilities amounted to rather less than €250,000 (assuming he had beenrepaying capital as well as interest charged on the original loan). Thus his equity inthe house had increased in value from €50,000 to €250,000 (i.e. the 2005 marketvalue of €500,000 less the outstanding debt of something less than €250,000originally borrowed) and, if he had sold his house, he could have expected to makea profit of roughly this amount….”44. I cannot see anything in the terms of the 2012/2015 Acts (and counsel for thepractitioner did not identify anything in the terms of those Acts) which would suggest thatthe Oireachtas intended that the word ‘equity’ (which is not defined in the 2012 Act) wasintended to have a meaning other than that explained by Wylie. I appreciate that thepassage quoted above from Wylie was not concerned with the 2012-2015 Acts. However,his explanation of the way in which the word “equity” is used is nonetheless illuminatingand is consistent with the common usage of that word in the context of propertyownership.45. Thus, for example, where the owner of a home which is already subject to a mortgageseeks to obtain further loans on the security of that property (in order, for example, tocarry out house repairs) the first question that the home owner will be asked by anyprospective finance provider will be: “How much equity do you have in the house?” Thatquestion is directed at identifying the difference between the value of the house, on theone hand, and the extent of any existing indebtedness secured on the property, on theother. That difference is often described as the “equity” of the mortgagor. The existencePage 16 ⇓of such an equity was recognised by both Barron J. in the High Court and by Walsh J. inthe Supreme Court in Bank of Ireland v. Purcell [1989] I.R. 327. In that case, an issuearose in relation to s. 3 (1) of the Family Home Protection Act, 1976 (“the 1976 Act”)under which a conveyance of an interest in the family home by one spouse, without theconsent of the other, is rendered void. Section 1 of the 1976 Act defines a “conveyance”as including a mortgage. The plaintiff bank in that case held a form of security which wasthen common, namely an equitable charge created by virtue of a deposit of title deeds.Such a deposit was made in 1975 by the defendant to secure both present and futureadvances by way of loan from the plaintiff. The title deeds included title to the familyhome of the defendant and his wife. No consent was required from the wife at the timethe original advance was made in 1975. The original advance predated the enactment ofthe 1976 Act. However, subsequent to the commencement of the 1976 Act, furtheradvances were made (on the security of the same deposit of title deeds) by the plaintiffbank to the defendant. At no time was the wife asked to give her consent for thepurposes of s. 3 to any such advances. Both the High Court and the Supreme Court onappeal came to the conclusion that her consent was required because, on each occasionwhen further advances were made, the equity of the defendant in the family home wasreduced. At p. 330-331, Barron J. explained the position as follows:-“The conveyance of the estate in lands is the conveyance of an interest forthe purposes of [s. 3 of the 1976 Act], but the fact that the estate hasalready been conveyed [by means of the deposit of title deeds] need notprevent a subsequent transaction from conveying an ‘interest’ in the lands.In the case of a mortgage the extent of the estate depends upon the amountwhich has been borrowed. Even in a case of a legal mortgage where there isa conveyance of the fee simple the interest of the mortgagor and of themortgagee in the lands so mortgaged will depend at any given time upon theextent of the monies lent and borrowed. No doubt so long as any monies arecharged on the lands the fee simple estate will be in the mortgagee.However, that of itself does not mean that thereafter the mortgagor cannotpurport to convey a further interest to the mortgagee, because in thatsituation the value of the equity of redemption is being altered on theoccasion of each further advance. The same situation arises in the presentcase. Each time there is a further advance the amount which is beingcharged on the lands is altered and accordingly the interest of the mortgagorin those lands is altered. I have no doubt that future further advances arethe conveyance of an interest in the lands for the purposes of s. 3…”.(emphasis added).46. Furthermore, when one considers the way in which the word ‘equity’ is used in s.102(6) itreinforces the view that ‘equity’ is being used in the same sense as explained by Wylie.The way in which the word ‘equity’ is used suggests that the intention is that the securedcreditor will be compensated for the reduction in the principal sum by getting somethingvaluable in return namely a share in the debtor’s equity. If the debtor has no equity inthe property in the sense described by Wylie, the grant of a share in the equity to thePage 17 ⇓secured creditor would not compensate for the reduction in the principal sum. At best, itwould, as counsel for the bank submitted, give the secured creditor the hope that, atsome stage in the future, the share in the ‘equity’ would have some value. Regrettably, ifthe secured indebtedness exceeds the value of the property, the debtor concerned maynever have any valuable interest in the property.47. I have accordingly come to the view (albeit on a purely obiter basis) that ‘equity’ must beconstrued as valuable equity or, more colloquially, positive equity in the property in thesense described by Wylie.48. All of that said, I fully appreciate the force of the submission made by counsel for thepractitioner (recorded in paras. 12-14) above that an arrangement of the kind proposedhere might, for the reasons which he described, work significantly better in practice thanmost forms of warehousing. Depending on the circumstances of an individual case, thelatter can give rise to unwelcome insolvency at the end of the mortgage term at a timewhen the debtor may, depending upon his or her age, have very limited finances availableto discharge the warehoused element of the debt. An arrangement of the kind proposedhere has the capacity to avoid that difficulty. However, if arrangements of that kind areto be available, it seems to me that significant amendments would need to be made tothe 2012-2015 Acts. It is not for the court to suggest what form any such amendmentsshould or might take. That is a matter entirely for the Oireachtas. However, if any suchamendments are to be made, I would strongly urge that any such statutory provisionsintroducing new debt resolution solutions should be set out in sufficient detail to enablepractitioners, debtors and creditors to identify and fully understand the precise scope andboundaries of any such solutions.Conclusion49. In light of the views which I have formed in relation to the proper interpretation ofs.103(2) and s.102(6)(f), I am unable to reach a view that the requirements of s.99 havebeen satisfied in this case. It follows that the application under s.115A cannot succeed.In those circumstances, the only order which I can make is to dismiss the appeal and,instead, to make an order affirming the order previously made by the learned CircuitCourt judge dismissing the application under s.115A.
Result: The appeal was dismissed and the order of the Circuit Court dismissing the application under s.115A was affirmed.
In the Matter of the Personal Insolvency Acts, 2012-2015 and in the Matter of Maeve Griffin
(a Debtor); and in the Matter of the Personal Insolvency Acts, 2012-2015 and in the Matter of Timothy Gerard Griffin (a Debtor)
[2018 No. 445 C.A.]
High Court
8 November 2019
unreported
[2019] IEHC 751
Mr. Justice Denis McDonald
November 08, 2019
JUDGMENT
Introduction
1. In each of the above cases, KBC Bank Ireland Plc (“ the bank ”) has appealed the decision of his Honour Judge Meghen in the Circuit Court made under s. 115A (9) of the Personal Insolvency Act, 2012 (“ the 2012 Act ”) (as amended by the Personal Insolvency (Amendment) Act, 2015), confirming the coming into effect of two interlocking personal insolvency arrangements proposed by Maurice Lenihan, personal insolvency practitioner (“ the practitioner ”) on behalf of the above named debtors Ms. Maeve Griffin and Mr. Timothy Gerard Griffin. In the very helpful written submissions delivered on behalf of the bank, the following grounds of objection have been canvassed:-
(a) That the proposed arrangements are not fair and equitable to the bank, as a class of creditor which has not approved them, contrary to s.115A (9) (e) of the 2012 Act;
(b) That the proposed arrangements are unfairly prejudicial to the bank, contrary to s. 115A (9) (f); and
(c) The arrangements do not enable the creditors of Mr. Griffin and Ms. Griffin to recover the debts due to them to the extent that their means reasonably permit, contrary to s. 115A (9) (b) (ii) of the 2012 Act.
2. In the course of the hearing which took place on 5th July, 2019, counsel for the bank indicated that the primary grounds of objection are those set out at para. 1 (a) and (b). Nonetheless, the ground set out at para. 1 (c) has not, in any sense, been abandoned. All three grounds were fully argued in the course of the hearing. As discussed further below, it seems to me that there is some overlap between these three grounds. I will, nevertheless, consider each ground separately.
3. For completeness, it should be noted that no issue arises in this case in relation to the availability of s. 115A. It was accepted, in the course of the hearing, that the family home of Mr. Griffin and Ms. Griffin in County Limerick is a “principal private residence ” within the meaning of s. 2 (1) of the 2012 Act. It is also accepted that the debt owed to the bank which is secured over the family home is a “ relevant debt ” within the meaning of s. 115A (18) – namely a debt secured over the principal private residence of Mr. Griffin and Ms. Griffin which was in arrears on 1st January, 2015.
4. It was also very helpfully acknowledged, in the course of the hearing, that, for the purposes of s. 115A (9) (g) of the 2012 Act, Charleville Credit Union (“the credit union”) (which, along with the Revenue Commissioners voted in favour of the proposed arrangement) constitutes a separate class of creditors to the bank notwithstanding that both the bank and the credit union are secured creditors of Mr. Griffin and Ms. Griffin. Counsel for the bank acknowledged that, having regard to the decision of Baker J. in Sabrina Douglas [2017] IEHC 785, the bank, as a secured creditor over the principal private residence of Mr. Griffin and Ms. Griffin was in a separate class to the credit union which holds no security over the residence in question.
Relevant facts
5. Before attempting to address the issues which fall to be considered, it is important that the relevant facts should first be identified. At the time the proposed arrangements in this case were first proposed in August 2017, Mr. Griffin was aged 50 years of age and Ms. Griffin was 49. They are married and have two children. At the time the arrangement was proposed, their daughter was nineteen years of age and their son was seventeen years of age. Mr. Griffin works as a probation officer with the Department of Justice where he has worked since 2014. Ms. Griffin is currently unemployed. According to the proposed arrangement in her case, Ms. Griffin was a care assistant. Previously both she and Mr. Griffin appear to have operated a nursing home business which ultimately failed in 2009. The credit union holds security over the former nursing home.
6. Mr. Griffin and Ms. Griffin have the following liabilities:-
(a) There is a total sum of €277,308 owed to the bank which is secured over the family home which has been valued at €140,000;
(b) There is a sum of €638,505 owed to the credit union which is secured over the former nursing home which has been valued at €80,000;
(c) Mr. Griffin owes €23,560 to Tipperary Credit Union. This is unsecured;
(d) Mr. Griffin has a credit card debt of €1,628 while Ms. Griffin has a credit card debt of €2,269;
(e) Ms. Griffin owes €19,522 on an unsecured basis to Allied Irish Banks Plc in respect of an overdraft;
(f) Ms. Griffin owes €28,693 to the Revenue Commissioners in respect of unpaid PAYE/PRSI. There is also a preferential debt owed by her to the Revenue Commissioners in respect of income tax in the sum of €2,100;
(g) Mr. Griffin also has a small debt owed to Cabot Financial in the sum of €3,598.
7. The monthly household income of Mr. Griffin and Ms. Griffin is not sufficient to discharge their monthly expenses. Mr. Griffin’s net monthly income is €3,410. Ms. Griffin receives unemployment benefit of €780 per month. This provides them with a total household income of €4,190 per month. Out of this sum, their set costs calculated in accordance with the guidelines issued by the Insolvency Service (“ISI”) are €1,901.53 (based on a two adult household with one motor vehicle). Their monthly obligations on foot of a mortgage to the bank are €1,839.07. In addition, they incur what are described as “ special circumstance costs” in the sum of €699 per month which are made up of €144 in respect of the cost of prescription medicine for their son who suffers from asthma together with €555 in respect of the cost of maintaining their daughter in third level education. That is marginally higher than the monthly figure of €549 which would be allowed by the Official Assignee in a bankruptcy.
The proposed arrangements
8. Under the proposed arrangements put forward by the practitioner, the indebtedness of Mr. Griffin and Ms. Griffin would be addressed over a six year (i.e. 72 month) term as follows:-
(a) Insofar as the debt of €277,308 to the bank is concerned, the secured debt would be written down to €140,000 (i.e. the agreed value of the family home) with the balance being addressed as an unsecured debt. For the 72 month duration of the arrangement, no element of principal would be repaid. Instead, interest at 4.25% would be paid of €495.83 per month. Following the completion of the arrangements, the interest rate would revert to the then standard variable rate applicable to mortgage loans of this kind. The term of the mortgage would be restructured to 240 months from the date the arrangements come into effect. After the arrangements come to an end, capital and interest monthly mortgage payments of €1,107.12 would be made for the 168 month period from the end of the proposed arrangements to the end of the restructured mortgage term. This is based on an assumed rate of 4.25% as at the end of the proposed arrangements. This, however, is obviously subject to the rate which is actually applicable at that time.
(b) Insofar as the credit union debt is concerned, Mr. Griffin and Ms. Griffin are to arrange for the sale of the former nursing home property. All costs associated with the sale of the property will be deducted from the proceeds of sale. In the event that the property is sold for less than €80,000 (which is the agreed valuation) the credit union will not be entitled to make any claim against Mr. Griffin or Ms. Griffin in respect of any shortfall. In the event that it is sold for more than €80,000, the credit union will be entitled to retain the proceeds for its own benefit. Mr. and Ms. Griffin agree to cooperate with the auctioneers during the sale process and will remove all personal effects from the property and assist the auctioneers. Any offers that are made will be subject to acceptance by the credit union. In the event that the credit union declines any offers over €60,000, the property will be voluntarily surrendered to the credit union. Similarly, if the property has not been sold within twelve months of the coming into effect of the proposed arrangements, the property will be voluntarily surrendered to the credit union.
(c) The preferential debt owed to the Revenue Commissioners by Ms. Griffin will be paid in full;
(d) The unsecured creditors will receive a dividend of 6.53% in the case of Ms. Griffin and 6.77% in the case of Mr. Griffin. In this context, it should be noted that, on p. 15 of the proposed arrangement in Ms. Griffin’s case, the rate of dividend is stated to be 7.09%. However, in the bankruptcy comparison, in her case, it is stated to be 6.53%. For the purposes of this judgment, I will proceed on the basis of the figure set out in the bankruptcy comparison.
Comparing the outcome under the proposed arrangements with the outcome in bankruptcy
9. The practitioner has prepared a comparison of the outcome under the proposed arrangements with the outcome in the event of a bankruptcy. On the basis of the figures provided by the practitioner, the return to the secured creditors (on a combined basis) under the proposed arrangements is 24 cent in the euro compared to 22 cent in the euro in a bankruptcy. Insofar as the unsecured creditors are concerned, they will, as noted in para. 8 (d) above, receive 6.53 cent in the euro in Ms. Griffin’s case and 6.7 cent in the euro in Mr. Griffin’s case. This compares to 0.22 cent in the euro in the event of Ms. Griffin’s bankruptcy and 0.50 cent in the euro in the event of Mr. Griffin’s bankruptcy.
10. In my view, it would have been helpful if the return to each of the secured creditors had been shown separately in the bankruptcy comparison. On the basis of my own calculations, the outcome for the bank under the proposed arrangements is significantly greater than 24 cent in the euro. By my calculations, it is 50.5 cent in the euro. In the event of a bankruptcy, the outcome is also better than 22 cent in the euro. By my calculations, the return for the bank in the event of bankruptcy is 45.40 cent in the euro. In contrast, the return for the credit union under the proposed arrangements (on the assumption that the nursing home sells for €80,000) will be of the order of 12.5 cent in the euro whereas, in a bankruptcy, the outcome would be 11.27 cent in the euro. In both cases, these rates of return exclude the dividend that will be paid as part of the distribution to the unsecured creditors. As outlined further below, a significant issue arises in this case in relation to the extent of the distribution to be made to the unsecured creditors.
The counter-proposal made by the bank
11. As discussed further below, a counter-proposal was made by the bank. That counterproposal must be seen in the context of the statutory scheme for the making of representations by creditors to a practitioner. Under s. 98 of the 2012 Act, the practitioner is required to give notice to creditors of his or her appointment and to invite the creditors to make submissions regarding the manner in which the debts of a debtor might be dealt with under a proposed arrangement. The practitioner is also under an obligation to consider any submissions made by creditors. Insofar as secured creditors are concerned, s. 102 (1) imposes a specific obligation on such creditors (following receipt of the notification under s. 98) to furnish to the practitioner an estimate of the market value of the security. In addition, s. 102 (1) enables the secured creditor to also indicate a preference as to how that creditor wishes to have the security and secured debt treated under the arrangement. This is, however, expressly made subject to s. 102 (3) and ss. 103 to 105 of the 2012 Act. In this context, it is important to bear in mind that under s. 104 (1) practitioners are required, in formulating proposals for personal insolvency arrangements, to do so in a manner which secures, insofar as reasonably practicable, the retention by a debtor of his or her principal private residence.
12. In this case, according to the evidence of the practitioner, the bank did not make any submission to him under either s. 98 or s. 102. The practitioner says that, in those circumstances, he had no alternative but to seek to formulate proposals in the absence of any submission from the bank. However, in para. 5 of his affidavit sworn in support of the bank’s notice of objection, Mr. Gately explained that, on 16th June, 2017, the bank submitted a request for further information which was never answered by the practitioner.
13. Subsequently, the bank, by email sent at 12.18 pm on 17th August, 2017 (which was one day immediately prior to the creditors’ meeting held on 18th August, 2017) submitted a counter-proposal. In that email, the bank complained that, in comparison to the credit union, it would fare significantly worse under the proposed arrangements. It said that, under the proposed arrangement, the credit union would be in a position to immediately recover the full value of its security over the nursing home and, over the course of the arrangement, would recover the same amount again through dividends over a six year period (€80,000). The email complained that: “on a very basic level, the Credit Union will recover double the value of its security over the next six years. Conversely KBCI … will be precluded from realising its security and will recover only €19,500 over the same period as a secured creditor. In reality the proposed large dividend is not being generated from the means of the debtor in a true sense, but from the draconian reduction of, and six year deferral of capital repayments to, the KBCI debt. The proposal fails to recognise the priority of the KBC debt and unfairly seeks to provide a disproportionate return to the Credit Union relative to its security” . Those concerns on the part of the bank were subsequently reiterated in para. 11 of the affidavit of Mr. Garret Gately.
14. In the email, the bank also complained that, on completion of the proposed arrangements, Mr. Griffin and Ms. Griffin would have a surplus monthly income of €1,596.26. The email made the point that even if 50% of that surplus was made available it would be sufficient to service payment of that part of the debt owed to the bank which it was proposed to write down (namely €138,000) over the remaining term of the mortgage.
15. The email concluded by making a counter-proposal as follows:-
(a) An extension of the mortgage term to 240 months;
(b) A 36 month personal insolvency arrangement (i.e. half the length of the proposed arrangements here);
(c) Interest only payments of €981 for the duration of the three year arrangement;
(d) A dividend pool of €24,500 from which the practitioner would receive a fee of €9,500 with the preferential debt due to the Revenue of €2,100 being repaid in full;
(e) The unsecured creditors would therefore receive a net dividend of €17,000 for distribution between them;
(f) The credit union (as the largest unsecured creditor) would receive €16,000. This is in addition to whatever it would recover through the realisation of the nursing home;
(g) Post the arrangement, Mr. Griffin and Ms. Griffin would commence full annuity repayments of €1,909 leaving them with a monthly surplus of €794 above the ISI guideline figure.
16. It should be noted that, under the terms of the arrangement proposed by the practitioner in each of these cases, it is acknowledged that the elder child of Mr. Griffin and Ms. Griffin (namely their daughter) would leave third level education in year 3 of the arrangement proposed by him. As I understand it, the monthly surplus of €794 suggested in the counter-proposal is based on this proposition.
17. In his replying affidavit, the practitioner deals with the counter-proposal at paras. 29-30 and paras. 42-43. In para. 29, he explained that, by reducing the term of the proposed arrangements to 36 months and increasing the monthly mortgage payment from €495.83 to €981, the counter-proposal would significantly reduce the monthly surplus that would otherwise be available to pay a dividend to the unsecured creditors. The proposal also envisaged a 50% reduction in his own fee but this is likely to be attributable, at least in part, to the fact that the duration of the arrangement proposed by the bank is 50% shorter than the 72 month arrangements proposed by the practitioner.
18. The practitioner says that the counter-proposal was considered and rejected by the debtors “ on the basis that it would not be supported by a majority of creditors and would not return them to solvency, particularly as it provided for the payment of the full mortgage loan and did not take account of the possibility of illness, marriage breakdown or other issues”. He also says that: “it was unrealistic to assume that unsecured creditors would support the KBC counter-proposal where it clearly demonstrated a significant reduction in the return to them when compared to the PIA proposal which was circulated in advance of the meeting of creditors and on which proxies (voting in favour) had already been received”.
19. In para. 43 of his affidavit, the practitioner expands on this and says:-
“43. I discussed the counter-proposal with the debtors at a meeting on 17th August called at very short notice to them. I expressed the view that the KBC counterproposal was self-serving and would not be acceptable to the other creditors on the basis that it provided a lower return than the existing PIA and denied those creditors scope to maximise their return over a 72 month term. I indicated to the debtors that the counter-proposal would not return them to solvency at the end of the PIA on the basis that the loan owed on their PDH will be almost twice the market value of the property. Accordingly, in the event of some unforeseen life event (illness, death, marriage breakdown, etc.) occurred (sic) which resulted in the sale of their home it was possible that they would be insolvent (again) and would be forced to consider bankruptcy in such circumstances. I also pointed out… that if the PIA was amended to reflect … the counter-proposal that it was highly likely that it would not be acceptable to their other creditors (who had already submitted proxies…) and that it was inevitably going to be rejected at the meeting … notwithstanding the support of the Objector. Accordingly, the debtors agreed to leave the proposal unchanged.
20. It should also be noted that, in para. 36 of his affidavit, the practitioner explained the reason why he had included a provision in the proposed arrangements that the bank would be paid interest only for the term of such arrangements. He said this was: “…for the benefit of all creditors, and in particular of creditors with debts that will be extinguished at the end of the PIA. I say for the most part, this arises in circumstances where the negative equity is to be extinguished and written off at the end of the PIA. I say and believe that in placing the mortgage loan on interest only I have increased the dividend to unsecured creditors, and ensured the best possible return in the circumstances”.
21. In the course of the hearing, counsel for the bank drew attention to what was said by the practitioner in these paragraphs and submitted that the explanations given by the practitioner strongly suggests that the practitioner favoured the credit union who, after payment of the proceeds of sale of the nursing home, is, by far, the largest unsecured creditor of Mr. Griffin and Ms. Griffin. As will appear in more detail below, the case made on behalf of the bank is that the credit union has been treated significantly more favourably than the bank.
22. Counsel for the practitioner submitted that the counter-proposal was made at the last minute. He also argued that the proposal would see payments being made to the bank at more than the rent for a comparable property in the locality in which Ms. Griffin and Mr. Griffin currently resides. Counsel drew attention to the information contained in the proposed arrangement which indicates that the market rent for an equivalent property in the locality would be €950 per month which is less than 50% of the monthly payment to be made under the counter-proposal namely €1,909. Counsel submitted that the bankruptcy would accordingly be a more favourable outcome for Ms. Griffin and Mr. Griffin than the regime envisaged in the bank’s counter-proposal.
23. Counsel for the practitioner also drew attention to the fact that, under the counterproposal, Ms. Griffin and Mr. Griffin would, for the three year duration of the arrangement proposed by the bank, have to live at a level beneath the reasonable living expenses set out in the ISI Guidelines. As set out on p. 40 of the proposed arrangement in Ms. Griffin’s case, a sum of €1,901.53 would be regarded as appropriate for a two adult household with a vehicle. In addition, for the first three years of the arrangement, there are special circumstance costs of €699 payable per month (to cover the cost of third level education for the daughter of Ms. Griffin and Mr. Griffin) and also to cover the costs of asthma medication for their son. The total monthly income of the household is €4,190. When one sets off the sums of €1,901.53 and €699 against the monthly income of €4,190.00, that would leave no more than €1,590.00 to meet the mortgage repayments of €1,909 per month under the counter-proposal. Counsel for the practitioner submitted that the only way, therefore, in which the monthly mortgage payment could be met was if the family lived below the reasonable living expenses set out in the ISI Guidelines.
24. Counsel for the practitioner also rejected the suggestion that there would be a monthly surplus of €794 after year 3 under the counter-proposal. As noted in para. 16 above, the case made by the bank is that there will be such a surplus from year 3 of the proposed arrangement when it is understood the daughter of Ms. Griffin and Mr. Griffin will leave third level education. Counsel for the practitioner suggested that it was reasonable to suppose that the son of Ms. Griffin and Mr. Griffin would go on to third level education (although counsel for the bank trenchantly submitted that this is nowhere mentioned in the proposed arrangement or in the evidence before the court). In fact, the practitioner, in para. 21 of his affidavit sworn on 19th June, 2018 does refer to the possibility (it is put no higher than that) that the son may go on to further education. The practitioner also says that the special circumstance costs in respect of the prescription medication in the amount of €144 should be extended beyond year 3. In my view, it is reasonable to take the cost of this prescription medication into account as an ongoing household expense. It is also understandable that the practitioner was not in a position to say that the son would definitely go on to third level education. For that reason, the continuing cost of third level education has not been factored into the calculation set out in the proposed arrangement. I am conscious that a very large number of students progress to third level education in Ireland. I therefore believe it is realistic to assume, for the purposes of this judgment, that it is reasonably likely that the son will progress to third level education. In those circumstances, I believe that it is appropriate to continue to take into account the special circumstance costs of €644 per month for a further three year period after the expiry of the three year arrangement proposed by the bank. For those years, the appropriate allowance to be made in respect of Ms. Griffin and Mr. Griffin (for a couple with no children) would be €1,509.59 (on the basis that they require a motor vehicle). If one adds €699 to that figure, that would mean that Mr. Griffin and Ms. Griffin would require €2,208.59 per month in order to meet reasonable living expenses and the special circumstance costs. If they were also to pay a further €1909 in respect of the mortgage repayment envisaged under the counter-proposal, they would have total monthly expenditure of €4,117.59. Assuming no substantial shocks, there would be a very marginal buffer available to them of €72.41 per month. However, this does not take account of the possibility that interest rates might rise. While we currently live in an era of low interest rates, there is no guarantee that this will still be the case in several years’ time.
25. Counsel for the practitioner also argued that the bank’s counter-proposal was made too late. It was not made until the eve of the creditor’s meeting. He argued that there had been a failure to comply with either s. 98 (1) or s. 102 (1) of the 2012 Act. In my view, the court must be cautious about any suggestion that a counter-proposal or submission should be wholly disregarded. The court has an obligation under s. 115A (10) (b)(i) to have regard to any submission made by a creditor under s. 98(1) or s. 102(1). Nonetheless, in this case, an issue arises as to whether the requirements of those subsections were actually observed by the bank. Section 98(1) does not expressly require that submissions should be made by a creditor within any specific time frame. However, it is clear from a consideration of s. 98(1) in the context of the 2012 Act as a whole, that it contemplates that the submissions will be made prior to the formulation of a proposed arrangement so that the practitioner will be in a position to have regard to them when he comes to formulate the proposal. The same considerations arise in relation to any indication of preference to be advanced by a secured creditor under s. 102(1). It is quite clear from s. 102(2) that the Act envisages that any indication of preference as to how the secured debt should be addressed, should be made prior to the formulation of the practitioner’s proposal. While s. 102 does not prescribe a statutory time period for taking this step, s. 102 (4) makes it clear that the secured creditor should act within whatever period of time may be specified by the practitioner. In the present case, the counter-proposal was not made until the day prior to the meeting of creditors at which the proposals were to be considered. Consistent with the email of 17th August, 2017 (quoted in para. 13 above) Mr. Gately explained in para. 5 of his affidavit that, within three days of receipt of the protective certificate, the bank had sought clarification on a number of points in order to enable the bank to submit a s. 98 or s. 102 response. Although the practitioner responded on the same day advising that he would arrange to get the additional information to the bank, the information was not provided. In these circumstances, it seems to me that, in fairness to the bank, I should treat the bank as having made a submission under s. 98 and s. 102 of the Act. However, as a consequence of the timing of the counter-proposal, the reality is that the practitioner had no sufficient opportunity to take the counter-proposal into account in formulating his proposals in circumstances where it was received at such a late stage in the process. It is important to bear in mind in this context that the court, under s. 115A (10) (b)(i), is required not only to have regard to the submission made by a creditor but also to the date on which such submission was made.
26. Having regard to the date of receipt of the counter-proposal, I do not believe that there is anything that the practitioner could reasonably have done in the circumstances. He had already formulated proposals. Those proposals had been circulated to all of the creditors. On the basis of those proposals, decisions had already been made by creditors as to whether to support or reject the proposed arrangement. While it was theoretically open to the practitioner to go back to the creditors with revised proposals, I can well understand why the practitioner, at that point, might have considered that it was not feasible to do so. I will examine in greater detail below the particular reasons given by the practitioner as to why he decided to proceed with the existing proposal. On the basis of the arguments put forward by counsel for the bank, those reasons are potentially material to the question as to whether the credit union was unduly favoured, under the proposals, at the expense of the bank. At this point, it is sufficient to record that, in my view, the timing of receipt of the counter-proposal was such as to make it reasonable for the practitioner to proceed with the creditors’ meeting on the following day on the basis of the existing proposals. I am, of course, conscious in this context of the observations of Baker J. in Paula Callaghan [2017] IEHC 332 at paras. 13-17 as to the obligation of a practitioner to consider submissions made by a creditor. However, those observations by Baker J. were made in the context of submissions made prior to the formulation of proposals. The present case is in a different category. Moreover, it is clear from para. 43 of the practitioner’s replying affidavit (quoted in para. 19 above) that the practitioner here did, in fact, consider the proposals. They were not ignored by him. He clearly took a considered decision to proceed with the creditors’ meeting and to reject the counter-proposal made by the bank.
27. In the same judgment, Baker J. suggested that a margin of appreciation will be afforded to a practitioner in formulating an arrangement and she indicated that the court should not interfere unduly with a proposal even if another and possibly equally reasonable proposal could be formulated. At para. 59 of her judgment in that case 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.”
28. Nevertheless, as noted in para. 25 above, the position taken by the practitioner is not determinative. It is clear from s.115A (10) (b)(i) that there is an obligation on the court to independently consider and have regard to any counter-proposal that may have been made by a creditor. I therefore believe that I must consider whether the counter-proposal made by the bank is one that achieves a better and fairer result than the proposal put forward by the practitioner. I reiterate that, in considering this issue, I will postpone any consideration of the motivation underlying the practitioner’s proposals. That is an issue which I address separately in the context of the bank’s contention that the arrangement unduly favours the credit union at its expense.
29. I have come to the conclusion that the counter-proposal put forward by the bank lacks reality. In the first place, it does not take account of the current market value of the family home of Ms. Griffin and Mr. Griffin. While I must separately consider whether the practitioner was correct in writing the secured debt down to the value of the family home, it seems to me that, in cases of significant “ negative equity ”, the current market value of the family home is a relevant factor in any arrangement proposed under the 2012-2015 Acts. It seems to me to be clear from a consideration of the provisions of ss. 102-103 of the 2012 Act that the legislature envisaged that, in arrangements of this kind (where the home is in “ negative equity ”), it will often be appropriate that the value of secured debt should be written down to some extent albeit that, in accordance with s. 103(2), it cannot be reduced below the value of the underlying security. Of course, there are cases where a write-down might not be appropriate. For example, if the debtors were of reasonably substantial means and were in a position to sustain mortgage payments of sufficient size, a write-down might be entirely inappropriate. However, in my experience, such cases are rare. This is not such a case. The means of Mr. Griffin and Ms. Griffin are clearly not sufficient to sustain mortgage repayments on the scale suggested by the bank in its counter-proposal. As discussed in para. 24 above, if they were to pay €1,909 in respect of the mortgage repayment envisaged under the counter-proposal, they would have no more than €72.41 available to them on a monthly basis over and above their monthly expenditure. As noted in para. 24, that seems to me to be a very marginal buffer. While I acknowledge that the buffer is likely to increase over time (as the children of Mr. Griffin and Ms. Griffin complete full time education) the Griffin family would nonetheless have to live for a sustained period of time at or very near the upper limit of the reasonable living expenses measured by the ISI. While there are cases where there may be no alternative to an arrangement on such stringent terms, it seems to me that the proposal put forward by the bank would impose a burden on Mr. Griffin and Ms. Griffin which is disproportionate to their means. I also bear in mind that, under the counter-proposal, Ms. Griffin and Mr. Griffin would have to make payments to the bank significantly in excess of the market rent for an equivalent property in the locality. As counsel for the practitioner observed, this would make bankruptcy a more favourable outcome for Ms. Griffin and Mr. Griffin than the regime envisaged in the bank’s counter-proposal. In these circumstances, I have come to the conclusion that the practitioner was right to reject the counter-proposal. I am furthermore of the view that the counter-proposal is not relevant to the remaining issues which arise for consideration (and which are addressed below).
The issues raised by the bank
30. To the extent that it is necessary to do so, I now turn to consider each of the grounds of objection which were debated in the course of the hearing before me in July 2019.
The alleged inequality of treatment
31. Under s. 115A (9) (e), the court, on an application of this kind, must be satisfied that the proposed arrangement is: “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.” The debate between the parties in relation to this issue occupied most of the time at the hearing in July.
32. In his written submissions, counsel for the bank sought to illustrate that, under the proposed arrangements, the return to the credit union was significantly better relative to the return to the bank. He drew attention to the fact that, under the proposed arrangement, the bank would receive a dividend from Mr. Griffin of €9,294.99 and a dividend from Ms. Griffin of €8,690.93 during the currency of the arrangement. This is in addition to the value of the bank’s security of €140,000. Insofar as the credit union is concerned, it would receive the value of its security namely €80,000 together with a dividend from Mr. Griffin of €37,807.68 and a dividend from Ms. Griffin of €36,448.89. The total to be received by the bank (excluding interest payable over the term of the arrangement and subsequently over the term of the mortgage) would be €158,255.92. In the case of the credit union, the total to be received would be €154,256.57.
33. Counsel for the bank then looked at the projected return in a bankruptcy. In a bankruptcy, the bank would receive €126,000 in respect of the family home together with an approximate dividend of €707.50 from Mr. Griffin and €300 in respect of Ms. Griffin. This would be a total realisation of €127,007.50. The credit union would receive €72,000.00 in respect of its security, a dividend of €1,222.00 from Mr. Griffin and a dividend of €2,878.00 from Ms. Griffin. This would be a total realisation of €76,100.00.
34. Counsel argued that, when one took account of the difference between the proposed realisation under the proposed arrangement of €158,255.92 as compared with €127,007.50 in a bankruptcy, the bank would achieve a 24.6% better return under the proposed arrangement than in a bankruptcy. In contrast, when one takes the difference between €76,100 which the credit union would receive in a bankruptcy and €154,256.57 which the credit union will receive under the proposed arrangement, the return for the credit union under the proposed arrangement is 102% better than in a bankruptcy.
35. Counsel also submitted that, if one takes the total realisation for the bank, under the proposed arrangement, to be €158,255.92, the difference between that sum and €140,000 reflects a 13% return for the bank over the value of its security. In contrast, if one takes the sum of €154,256.57 which would be payable to the credit union under the proposed arrangements, the credit union will receive a return of 93% on top of the value of its security. Counsel submitted that the comparison of the combined returns illuminates the reasons why the bank says that the arrangements are not fair and equitable to it and why they unduly favour the credit union. Counsel also submitted that the counter-proposal had been put forward by the bank to “ rebalance the equities” and he said that this counter-proposal was still on offer from the bank.
36. Counsel for the bank argued that there was no justification for the approach taken by the practitioner here in “ favouring ” the credit union in the manner summarised above. As noted in para. 21 above, counsel argued that the explanation given by the practitioner (as quoted in paras. 18-20 above) demonstrates that the practitioner consciously favoured the credit union at the expense of the bank. Counsel sought to rely in this context on my decision in Noel Tinkler [2018] IEHC 682. In that case, very unusually, the proposed arrangement envisaged that the secured creditor over the principal private residence of the debtors would be paid in full notwithstanding that the value of the property was significantly less than the debt owed. The practitioner involved in that case had sworn an affidavit, in the course of the proceedings, in which he had acknowledged that the arrangement proposed by him had been formulated with a view to obtaining the support of the secured creditor concerned. An entirely different approach had been taken in the context of the objecting creditor (which held security over other property of the debtors). In para. 45 of my judgment in that case I said:-
“It is true that … 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”.
37. Counsel for the bank argued that, on the basis of the calculations set out in paras. 32-35 above, the proposals here unduly favour the credit union. Counsel also argued that there has been no objective justification for that difference in treatment. He submitted that, as occurred in Tinkler, the practitioner has explicitly stated that he refused to put the counter-proposal to the credit union on the basis that it would not be accepted by it. Counsel referred in this context to the averments made by the practitioner (quoted in paras. 18-20 above).
38. In contrast to the position in Re. Antigen Holdings [2001] 4 IR 600, counsel submitted that there was no objective justification for the difference in treatment, as between the credit union and the bank. In the Antigen case, the court accepted that the trade creditors were entitled to some priority under the arrangement proposed by the examiner in that case in circumstances where, as McCracken J. observed, they were going to continue trading with the company. Counsel argued that, in contrast, no such justification existed in the present case. He drew attention in this context to the additional affidavit that had been served, with the leave of the court, in the course of the appeal, in which Mr. Gately had explained that the credit union was now in liquidation (although this had not been known at the time of the Circuit Court hearing). Counsel submitted that the “ preferential treatment ” given to the credit union, in those circumstances, cannot be justified. There is no question of any ongoing relationship between the credit union and Ms. Griffin and Mr. Griffin. The nursing home has ceased business.
39. In response, counsel for the practitioner argued that the credit union and the bank are dealt with in precisely the same way under the scheme. In both cases, the property secured in their favour is in negative equity and the secured debt is to be written down to the value of the secured property. In both cases, the balance of the indebtedness (after making due allowance for the value of the secured property) is treated as an unsecured debt. In both cases, the dividend payable to the bank and to the credit union is calculated in the same way. Counsel said that this was in compliance with s. 100 (3) of the 2012 Act which applies the pari passu principle. Section 100 (3) is in the following terms:-
“(3) Unless provision is otherwise made in the …, arrangement and subject to section 101, the arrangement shall provide for payments to creditors of the same class to be made on a pari passu basis, and where so otherwise provided the … Arrangement shall specify the reasons for such provision being made”.
40. The reference in s. 100 (3) to s. 101 is not relevant for present purposes. Section 101 deals with preferential debts. Counsel for the practitioner stressed that the pari passu principle also features in bankruptcy, examinerships and the winding up of companies. It has often been described as a fundamental principle in the context of insolvent estates (whether corporate or personal). That said, I believe that counsel for the practitioner is mistaken in suggesting that s. 100 (3) of the 2012 Act is immediately relevant. It will be seen from the terms of the subsection (quoted in para. 39 above) that the statute envisages that the pari passu principle will be applied as between creditors of the same class. It has been agreed in this case (and the parties were correct to do so) that, although both are secured creditors, the bank and the credit union are not in the same class of creditor for the purposes of the 2012-2015 Acts. In those circumstances, I do not believe that it is entirely correct to suggest that s. 100 (3) has application save to the extent that both the bank and the credit union are also unsecured creditors.
41. Nonetheless, the pari passu principle has, for many years, been regarded as a hallmark of fairness insofar as distributions to creditors are concerned. Thus, although section 100 (3) may have no immediate application, the pari passu principle is relevant to the question of fairness and it is clear from the terms of the proposed arrangement that it is proposed by the practitioner that it should apply in this case. All of the unsecured creditors will be paid at the same rate. This includes the unsecured element of the debt due to the bank and the unsecured element of the debt due to the credit union. In principle, it is difficult to see how the application of the pari passu rule, of itself, could be said to give rise to unfairness. That does not, however, resolve the fairness issue. A separate question arises as to whether the arrangements here have been framed in a way that gives rise to unfairness as a consequence of the amount set aside for payment to the unsecured creditors (under which the bank argues that the credit union is to benefit at the bank’s expense).
42. Counsel for the practitioner acknowledged that the bank is treated differently to the credit union insofar as the property secured in favour of the latter is to be realised whereas the property secured in favour of the bank (namely the family home of Ms. Griffin and Mr. Griffin) will be retained. However, in common with the credit union, the bank would get the benefit of the market value of its security namely the family home. While the arrangements do not allow for the realisation of the family home in the way in which the property secured in favour of the credit union is to be realised, the bank would be compensated for this by the interest which would be paid between now and the completion of the term of the mortgage. He drew attention, in this context, to the policy of the 2012-2015 Acts to ensure that the family home should be retained. In this context, s. 99 (2) (h) of the 2012 Act expressly provides that an arrangement “ shall not require that the debtor dispose of his or her interest in the debtor’s principal private residence or cease to occupy such residence unless the provisions of section 104 (3) apply”. In turn, s. 104 (1) reinforces the level of protection given to the family home under the 2012 Act. That subsection is in the following terms:-
“(1) In formulating a proposal for a Personal Insolvency Arrangement a personal insolvency practitioner shall, insofar as reasonably practicable, and having regard to the matters referred to in subsection (2), formulate the proposal on terms that will not require the debtor to—
(a) dispose of an interest in, or
(b) cease to occupy ,
all or a part of his or her principal private residence and the personal insolvency practitioner shall consider any appropriate alternatives.”
43. Counsel for the practitioner contended that the only other difference envisaged by the proposed arrangements between the position of the bank, on the one hand, and the credit union, on the other, arises from the size of the respective debts. Given the sheer size of the unsecured debt owed to the credit union, it must, of necessity, receive a larger dividend than the bank. In this context, counsel submitted that the debt owed to the bank comprised no more than 18% of the unsecured indebtedness of Ms. Griffin and Mr. Griffin whereas the debt owed to the credit union comprised 77% of that indebtedness. Applying the pari passu approach (which he argued was the correct approach), it was inevitable that the return to the credit union would greatly exceed in absolute terms the return to the bank.
44. Counsel for the practitioner also argued that the bank’s interests were not harmed by the proposal under which it would be paid interest only for the duration of the proposed arrangements. He argued that such an arrangement is expressly envisaged by s. 102 (6) (b) of the 2012 Act. Section 102 addresses the position of secured creditors. Section 102 (6) sets out a number of approaches which can be taken in relation to secured debt. Under s. 102 (6) (a), provision can be made that the debtor should pay interest and only part of the capital amount of the secured debt for a specified period of time (not exceeding the duration of the arrangement).Section 102 (6) (b) permits an arrangement to provide that the debtor should make interest only payments on the secured debt for a specified period of time (which again must not exceed the duration of the proposed arrangement).Section 102 (6) (c) provides that the period over which the secured debt is to be paid may be extended by a specified period of time. Furthermore, under s. 102 (6) (d), a complete moratorium on payments could be imposed for the duration of a proposed arrangement. Obviously, the arrangement here does not go that far. Counsel for the practitioner suggested that no injury is done to the bank by taking the approach set out in s. 102 (6) (b). He suggested that, once the arrangement comes to an end, the capital sum owed to the bank will remain to be paid in full and, in addition, interest will apply at the appropriate variable rate which the bank is entitled to charge under the terms of the loan contract with Ms. Griffin and Mr. Griffin.
45. The issue which I must address is whether the proposed arrangement is fair and equitable in relation to the class of creditor comprising the bank on the one hand and the class of creditor comprising the credit union on the other. Section 115A (9) (e) makes it clear that, before the court can approve an arrangement of this kind, it must be satisfied that the 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 the arrangement coming into effect). It must, however, be acknowledged that a practitioner, formulating an arrangement of this type, will rarely be in a positon to achieve mathematical or perfect equality. Furthermore, if the arrangement is to work, it is usually essential that some provision should be made for unsecured creditors. Depending on the circumstances, this may have the result that the secured creditors’ interests will be impaired to some extent by the arrangements to be made for the benefit of the unsecured creditors. The very fact that s. 102 (6) of the 2012 Act envisages circumstances where, for the duration of an arrangement, there can be a moratorium on payments to a secured creditor (or the payment of interest only to a secured creditor) suggests that the legislature envisaged that modifications of that kind to mortgage obligations might be necessary in order to give a breathing space to debtors to address their obligations not only to their secured creditors but also to the remaining unsecured creditors.
46. As Baker J. observed in Paula Callaghan, at para. 59 of her judgment (quoted in para. 27 above), a margin of appreciation will be afforded to a practitioner in formulating a personal insolvency arrangement. In part, this is in recognition of the fact that, in any given case, a practitioner will be required to balance many different competing interests in formulating a proposal for an arrangement. The court must always be conscious of the practical difficulties which confront the practitioner in undertaking this hugely important task. The court must also keep in mind the very important statutory role given to the practitioner under the 2012-2015 Acts. The practitioner is entrusted with the task of formulating proposals which are sustainable and which provide a return for the creditors of the debtor which is commensurate with the means of the debtor. As a personal insolvency professional, the practitioner is equipped with the necessary experience and expertise to assess the means of the debtor, the extent of the indebtedness, and the feasibility of any proposed arrangement, while at the same time balancing the competing interests which arise.
47. The question which arises in the present case is whether, notwithstanding this margin of appreciation, the proposal here involves a sufficiently serious difference in treatment as between the bank, on the one hand, and the credit union, on the other, as to engage the provisions of s. 115A (9) (e). In this regard, there can be no doubt that, in the absence of objective justification, inequality of treatment is an aspect of unfairness. As Fennelly J. observed in the Supreme Court in Re. SIAC Construction Ltd [2014] IESC 25 (at para. 69):-
“Unfairness, … comprises two essential aspects, the general notion of injustice and the more specific one of unequal treatment.”
On the other hand, it is clear from the decision of McCracken J. in Re: Antigen Holdings Ltd [2001] 4 I.R. 600 at p. 603 that, depending on the circumstances, a difference in treatment between different classes of creditors may be permissible if it can be objectively justified.
48. In my view, the bank has raised a very serious issue in relation to inequality of treatment. As noted in paras. 32-35 above, counsel for the bank has drawn attention to what, on its face, is a significant disparity of treatment as between his client and the credit union. As further noted in para. 34 above, the bank would achieve a 24.6% better return under the proposed arrangement than in a bankruptcy. In contrast, the return for the credit union under the proposed arrangement is 102% better than in a bankruptcy. This disparity cannot be explained by the value of the respective security held by the bank, on the one hand, and the credit union, on the other. The value of the security held by the bank is higher than the value of the security held by the credit union. The value of the bank’s security (namely €140,000) equates to 50.5% of the total indebtedness of Ms. Griffin and Mr. Griffin to the bank (€277,308). In the case of the credit union, the value of the security held by it (€80,000) equates to only 12.5% of the amount owed by Mr. Griffin and Ms. Griffin (namely €638,505) to the credit union. It is therefore clear that the claimed disparity of treatment under the proposed arrangement arises as a consequence of the extent of the provision proposed for unsecured creditors. As noted above, it is entirely reasonable for a practitioner to formulate a proposed arrangement on the basis that appropriate provision should be made for unsecured creditors as well as secured creditors. However, the concern raised by the bank relates to the extent of the provision made for the unsecured creditors which has given rise to the disparity in the rate of return under the proposed arrangements relative to the return in a bankruptcy (as outlined above).
49. The total amount to be paid to the unsecured creditors, under the proposed arrangements, is the sum of €49,051.33 in the case of Ms. Griffin and the sum of €52,904.51 in the case of Mr. Griffin. This means that, between them, the proposed arrangements envisage that a sum of €101,955.84 will be paid to the unsecured creditors of both debtors. In contrast, according to the bankruptcy comparison set out in the proposed arrangements, the unsecured creditors, in the event of the bankruptcy of Mr. Griffin would receive €3,734 while, in the case of Ms. Griffin, they would receive €1,634. On a combined basis, the unsecured creditors would therefore receive €5,368 in a bankruptcy. By my very rough calculations, this is approximately 19 times less than they would receive under the proposed arrangements. In other words, they will be 19 times better off, under the proposed arrangements, than they would be in a bankruptcy. That seems to me to raise a significant issue as to the proportionality of the proposed arrangements. Is it right that the unsecured creditors should receive 19 times the return they would obtain in the event of bankruptcy while the bank (which holds security over property) would receive a 24.6% better return under the proposed arrangement than in a bankruptcy? In turn a similar question arises as to whether it is right that the credit union will receive a 102% better return under the proposed arrangements than it would receive in the event of a bankruptcy. On the other hand, it has to be borne in mind that, under the proposed arrangements, both the bank and the credit union would each participate in the distribution of the dividend to be paid to the unsecured creditors. They would therefore each get the benefit of the 19 fold return on that part of the debts due to them which exceeds the value of the underlying security.
50. I bear in mind that, in para. 33 of his affidavit filed in June 2018 in the course of the Circuit Court proceedings, the practitioner has made the case that the total return for the bank amounts to €226,318.70 when account is taken of the payment of interest which, over time, would amount to €68,062.78 (calculated at 4.25% per anum). If the total return for the bank is taken to be €226,318.70, this would represent a return of 81.67% of the total indebtedness of €277,308. This would represent a 78% better return than in a bankruptcy. This is much closer to the 102% figure achieved by the credit union than the 24.6% figure suggested by counsel for the bank (as recorded in para. 34 above). However, I do not believe that it is reasonable or appropriate to take the return to the bank to be €226,318.70. As the practitioner acknowledges in para. 33 of his affidavit, this return would only arise over the 72 month term of the arrangement and, thereafter, the 240 month term of the mortgage. In my view, the interest to be paid over the 240 month term of the mortgage is clearly compensation for the fact that, in contrast to the credit union, the bank will not be entitled to an immediate realisation of the security held by it over the family home and instead will have to wait until the mortgage term comes to an end. In this case, it is noteworthy that the bank was the original lender. The payment of interest was always, therefore, integral to the long term nature of the mortgage arrangement put in place.
51. I must also bear in mind that the practitioner was faced with the difficulty of formulating a proposed arrangement which required appropriate provision to be made for two secured creditors, one of which held security over the family home (i.e. the principal private residence of Ms. Griffin and Mr. Griffin within the meaning of the 2012 Act) and the other (namely the credit union) which held security over commercial property. In accordance with the provisions of s. 99 (2) (h) and s. 104 (1), he was required to formulate the proposed arrangement on the basis that there would be no disposal of the family home. In the case of the credit union, he was required under s. 103 (1) to include a term in the arrangement that gave the credit union not less than the value of the security held by it over the nursing home. In the case of the bank, he was required under s. 103 (3) to ensure that the principal sum due under the mortgage would not be reduced below the value of the family home (although he was not required to reduce it to that value). There is one common thread underlying these requirements. In both cases, the practitioner is not entitled to reduce the amount due to the secured creditor below the value of the underlying security. He has formulated his proposals on that basis. In both cases, the value of the secured debt has been written down to the market value of the underlying property. In both cases, he has also taken the same approach in relation to payment of the balance of the indebtedness over and above the value of that security. In both cases, he has treated the balance as being wholly unsecured with each party participating in the dividend to be paid to the unsecured creditors at the same rate in accordance with the pari passu principle. In that way, it could be suggested that he has treated both secured creditors on an equal footing. It can be argued that the proposed arrangements accordingly bear all the hallmarks of equal treatment. While the credit union will receive a higher payment than the bank, this is simply a reflection of the fact that the unsecured debt due to the credit union is significantly higher than the amount due to the bank.
52. Based on the return to the credit union of €154,256.57 (mentioned in para. 32 above) the credit union would recover 24% of the overall debt due to it. In other words, it would suffer a loss of 76% of the amount due. In contrast, having regard to the higher value of its security and the lower extent of the debt due to it, the bank, based on the return to it (excluding interest) of €158,255.92, would recover 57% of the debt of €277,308. In other words, it would suffer a loss of 43% of the overall debt owed to it. This rate of loss is significantly less than the rate of loss which would be sustained by the credit union. To that extent, it could be suggested that the bank fares better under the practitioner’s proposals than the credit union. By my calculations, the extent of the loss sustained by the credit union (at 76%) relative to the loss sustained by the bank (43%) has the consequence that the credit union is 77% (76.74% to be precise) worse off (in terms of its overall loss) than the bank. However, this is unsurprising given the extent of the “ negative equity” in the nursing home relative to the extent of the “negative equity” in the family home. In circumstances where the negative equity in respect of the nursing home is proportionately greater than the negative equity in respect of the family home, one would expect that the credit union would be (relatively) worse off than the bank in terms of the extent of the loss suffered by it. However, the calculations highlighted by counsel for the bank (as summarised in paras. 32 to 35 above) demonstrate that, under the proposed arrangements, the credit union would benefit to a disproportionate degree. Under those proposed arrangements, the outcome for the credit union is significantly better than the outcome for the bank and no sufficient justification has been established for this disparity in treatment. In particular, the sheer extent of the provision made for the unsecured creditors (which gives rise to the significantly better return for the credit union than the bank) has not been adequately explained or justified. I do not see anything in the papers before the court which sufficiently explains why such extensive provision was made for the unsecured creditors. In my view, the extent of the provision made for the unsecured creditors is disproportionate. It results in a rate of return which is out of kilter with the range of dividends which I have seen paid to unsecured creditors in comparable cases (i.e. in cases where, in the event of a bankruptcy of the debtor, the unsecured creditors would receive a dividend of the order of 0.22 – 0.50 cent in the euro). In the circumstances, I am compelled to come to the conclusion that the arrangements proposed by the practitioner here cannot be said to be fair and equitable to the class of creditors represented by the bank. In short, the disparity of treatment cannot be said to be equitable. As a consequence, I cannot be satisfied that the requirements of s. 115A (9) (e) have been satisfied in this case.
53. I believe that the analysis undertaken by counsel for the bank (as summarised in paras. 32-35 above) demonstrates that the effect of the arrangements proposed in these interlocking cases is that the credit union will fare significantly better than the bank. There is a clear disparity in the way in which they are each affected by the terms of the arrangement. While I fully accept that perfect equality can rarely be achieved as between creditors holding security over different assets, the sheer extent of the disparity here is such as to make it impossible to conclude that the bank has not been treated inequitably. It seems to me that the terms of the arrangements require recalibration so as to provide for a more equitable distribution as between the credit union and the bank.
54. In reaching this conclusion in relation to s. 115A (9) (e), I stress that I do not believe that there is any sufficient evidence to suggest that the practitioner, in these cases, has deliberately sought to inflate the extent of the dividend to be paid to the credit union. However, on my reading of the evidence, that is not what occurred. Unfortunately, the submission made by the bank in this case (which highlighted the claimed disparity of treatment) was not made until the day prior to the creditors’ meeting. At that point, the practitioner had already circulated all of the creditors with the proposed arrangements. Each of the creditors had already reached a decision as to how to vote on the arrangement. It was simply too late at that stage to take account of the submission made by the bank. In my view, it is perfectly understandable why the practitioner should have proceeded with the creditors meeting in those circumstances. In paras. 18-20 above, I have quoted the most relevant extracts from the affidavit of the practitioner dealing with the dilemma faced by him after receipt of the counter-proposal from the bank. He expressed himself in quite blunt terms about the value of the counter-proposal. For reasons which I have explained at an earlier point in this judgment, I believe that the practitioner was entitled to reject the counter-proposal. It is true that the practitioner also advised Ms. Griffin and Mr. Griffin that if the arrangements were to be amended to reflect the counter-proposal, it was highly likely that it would not be acceptable to their other creditors (who had already submitted proxies). This does not suggest to me that the practitioner had intentionally drafted his proposal with a view to preferring the other creditors. On the contrary, it seems to me to be no more than quite pragmatic advice that, if the arrangements were to be amended to reflect the less favourable terms proposed for creditors under the counter-proposal, there was a likelihood that the creditors (who had already been in receipt of the proposals circulated by the practitioner for an arrangement that was significantly less favourable to them) would reject them. As noted in para. 15 (e) above, the net dividend available to the unsecured creditors under the counter-proposal was €17,000. It is unsurprising that the practitioner thought that the creditors would not be prepared to support such an arrangement in circumstances where, under his proposals, the sum available for unsecured creditors was €101,955.84. If one excluded the unsecured dividend to be paid to the bank of €18,255.92, there would still be a significant fund of €83,699.92 available for distribution to the remaining unsecured creditors under the practitioner’s proposals. The advice given by the practitioner to the debtors must be seen against this backdrop.
Unfair prejudice to the bank
55. In light of my conclusion in relation to s. 115A (9)(e), it is, strictly speaking, unnecessary to consider the other issues debated at the hearing of the appeal. Nonetheless, for completeness, I will now address the issue of unfair prejudice within the meaning of s. 115A (9) (f) which has also been raised by the bank. As noted above, each of the unsecured creditors will participate on a pari passu basis in the distribution of the fund available under the practitioner’s proposals for the unsecured creditors. As further noted above, the pari passu basis of distribution is universally recognised as a fair and equitable means of distribution to creditors of an insolvent estate (whether personal or corporate). However, the issue here is not with the application of the pari passu principle but with the extent of the provision that has been made for the unsecured creditors. As a consequence of the extent of provision made, it is contended that the bank suffers an unfair prejudice. The bank’s complaint is that the generous dividend to the unsecured creditors in this case is, in fact, being funded by it. Were it not for the moratorium on repayments of capital under the proposed arrangements, it would not be possible to make such a generous payment to the unsecured creditors in these cases. While I stress that there is nothing, per se, objectionable in making provision for unsecured creditors, it is the extent of the provision which has been made in this case which gives rise to potential difficulty.
56. In the context of s. 115A (9) (f), I am required to consider whether the arrangements are not unfairly prejudicial to the interests of any interested party. The concept of unfair prejudice is not defined in the 2012 Act. Significant guidance was given as to its meaning (in an examinership context) by O’Donnell J. in the Supreme Court in McInerney Homes Ltd [2011] IESC 31 at paras. 29-30. In those paragraphs, O’Donnell J. highlighted that an arrangement of this kind is inherently prejudicial to creditors insofar as it requires them to accept a written down amount for their debt. Prejudice, of itself, is not sufficient to engage the provisions of s. 115A (9) (f). As a consequence, the question in any particular case is whether the prejudice suffered by an individual creditor can be said to be unfair. O’Donnell J. then continued as follows:-
“29. … 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 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.
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. 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. …”.
57. Further guidance was given by Baker J. in Michael Ennis [2017] IEHC 120 where she said at para. 40:-
“I have considered the provisions of s. 115A in a number of judgments, most recently in Re JD … 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.”
In the interlocking cases before the court, the bank will fare better under the proposed arrangements than it would in a bankruptcy. To that extent, the proposed arrangements pass the “ vital test ” mentioned by O’Donnell J. in McInerney Homes. As noted in para. 10 above, by my calculations, the bank will secure a return of 50.5 cent in the euro under the proposed arrangements whereas, the outcome for the bank in the event of bankruptcy is 45.40 cent in the euro.
58. However, it is clear from the judgment of O’Donnell J. that, while a comparison with the outcome in a bankruptcy is an essential consideration in the context of unfair prejudice, it is not the only consideration. O’Donnell J. stressed the flexibility of the test. It is also clear that, in assessing whether any prejudice is unfair, the issue should be considered in the round. The bank contends that there is manifest unfairness to it here in the circumstances where the main source of funding for the generous dividend to the unsecured creditors is generated by the moratorium on the repayment of capital over the 72 month period of the proposed arrangements. During that period, the bank loan will be paid on an interest only basis. The bank also reiterates the points made by it in the context of s. 115A (9) (e) that, as a consequence of the way in which the proposed arrangements have been formulated, the return to the credit union is “ vastly superior ” to the return under a bankruptcy when compared with the relative return for the bank under the proposed arrangements, relative to the rate of return in a bankruptcy.
59. As noted in para. 44 above, counsel for the practitioner has argued that the proposed moratorium on the repayment of capital is expressly envisaged by s. 102 (6) (b) of the 2012 Act. He is obviously correct in making that submission. However, the extent of the provision made for unsecured creditors here is striking. In my experience, it is unusually generous. As noted in para. 9 above, the return for the unsecured creditors in a bankruptcy would be of the order of 0.22 cent in the euro in the event of Ms. Griffin’s bankruptcy and 0.50 cent in the euro in the event of Mr. Griffin’s bankruptcy. This compares with 6.53 cent in the euro and 6.7 cent in the euro respectively under the proposed arrangements.
60. As noted above, the practitioner, in formulating arrangements of this kind, is to be accorded an appropriate margin of appreciation. However, that is not to be confused with carte blanche. Any arrangements proposed by a practitioner will, in the event that s. 115A has to be invoked, be subject to the myriad of considerations which arise under that section including the requirements of s. 115A (9) (f). As a number of judgments of Baker J. highlight, the onus is on the practitioner to demonstrate that the requirements of s. 115A have been satisfied.
61. As noted in the context of s. 115A (9) (e), the proposed arrangements, on their face, might appear to treat both the bank and the credit union in the same way. Nonetheless, as the submissions of counsel for the bank have demonstrated (as set out in paras. 32-35 above) the credit union will fare better than the bank, on a relative basis, under these arrangements than in the event of a bankruptcy. In considering the matter in the round, I must also bear in mind that, in the case of the security held by the bank over the family home, s. 103 (2) of the 2012 Act applies. That subsection applies to cases where property secured in favour of a secured creditor is to be retained under an arrangement and, at the same time, the arrangement provides for a reduction of the principal sum due in respect of the secured debt. In such circumstances, s. 103 (2) provides, for the protection of the secured creditor, that the principal sum cannot be reduced to an amount less than the value of the security (as determined in accordance with s. 105). However, it is clear from the case law, that a write down of the principal sum to the market value of the secured property is not automatic. As Baker J. explained in Laura Sweeney [2018] IEHC 456 at para. 54 any write down of the principal sum under s. 103 (2) is to be assessed in the light of the repayment capacity of the debtor. At para. 56 of the same judgment Baker J. emphasised that a write-down to market value is not directed by the 2012-2015 Acts and she reiterated that the extent of any write-down is to be measured by reference to the affordability of payment.
62. Consistent with the approach taken by Baker J., I expressed a similar view subsequently in Lisa Parkin [2019] IEHC 56 where I said at para. 109:-
“I … 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. … That is an extremely important protection for secured creditors and is undoubtedly informed by respect for the property rights of such creditors.”
63. In order to consider the matter in the round, it seems to me that I must, therefore, consider whether the practitioner has justified the proposed write-down of the mortgage debt due to the bank to the market value of the family home. If that write-down can be justified, then the only issue that would arise under s. 115A (9) (f) is whether the generous provision made for unsecured creditors gives rise to unfair prejudice. If, on the other hand, it emerges that there is no sufficient justification put forward for the write-down in value, then it seems to me, considering the matter in the round, it would be very difficult to say that the bank has not been unfairly prejudiced by the “ double-whammy” of the imposition of a moratorium on repayments of capital and an unjustified write-down in market value. In those circumstances, I propose to move, at this point, to a consideration of the third of the issues raised by the bank.
The complaint made under s. 115A (9) (b) (ii) of the 2012 Act
64. It is a requirement of s. 115A (9) (b) (ii) of the 2012 Act that, before an arrangement can be approved, the court must be satisfied that there is a reasonable prospect that the arrangement will:
“enable the creditors to recover the debts due to them to the extent that the means of the debtor reasonably permit”.
65. In this case, the bank draws attention to the fact that, on the basis of the figures set out in the proposed arrangements and the written down value of the principal sum to €140,000, the debtors will have a monthly surplus, following completion of the arrangements of €1,596.26, after discharging their reasonable living expenses and the payments due on foot of the mortgage. This raises a question as to why it was necessary in those circumstances to reduce the principal sum due in respect of the mortgage over the family home to €140,000. Having regard to the principles outlined by Baker J. in Laura Sweeney, the existence of such a significant monthly surplus, after completion of the arrangements, suggests that Ms. Griffin and Mr. Griffin could afford to make repayments in respect of a higher principal sum.
66. The existence of this surplus was very specifically raised by the bank in the course of the Circuit Court proceedings. The response given by the practitioner in paras. 21 and 22 of his affidavit was in the following terms:-
“Paragraph 8 of the objecting creditor affidavit states that ‘…will have a surplus monthly income of €1,596.26’. This is entirely incorrect. Based on year 1 household income, year 7 RLE and year 7 mortgage repayment the debtors will have a ‘projected’ monthly surplus at the end of the PIA. There is no visibility or certainty to this figure. In my view it is merely a projected/theoretical amount based on ‘known knowns’ when the PIA is proposed to creditors in the first instance. It does not take account of the possible reduction or loss of illness benefit entitlements, the possibility of special circumstance costs for their son’s further education, any costs arising based on Maeve Griffin’s health situation or any other issues over the term of the PIA. Equally it does not take account of any potential salary increments that may accrue to Gerry Griffin over the period.
22. Based on the foregoing the income and RLEs have been maximised for the benefit of creditors for the maximum period of a PIA and a theoretical post PIA household monthly surplus cannot be taken as a firm/actual amount at this point in time as it may be influenced/impacted by other factors in the intervening period, and in any event, is not captured in the ‘means of the debtor’ as per the capital PIA.” (Emphasis in original).
67. In my view, these averments by the practitioner fall far short of providing any sufficient explanation as to why the practitioner reduced the principal debt due to the bank to the value of the family home particularly in circumstances where, on his own figures, there is likely to be a surplus of as much as €1,596.26 per month after the completion of the 72 month arrangements. I note, in this context, that in para. 22 of his affidavit (quoted above) the practitioner suggests that any surplus arising following completion of the proposed arrangements would not be “ captured ” by the “ means of the debtor ” as provided for in s. 115A (9) (b) (ii). As I understand the suggestion made by him, the practitioner seeks to rely on the language of the statutory provision in question which suggests that what the court is required to address is the extent to which the means of the debtor are brought to bear under the terms of the arrangements. If the court is confined to considering the terms of the arrangements, any surplus which arises post arrangement (so it might be argued) falls outside the ambit of the statutory provision. If that is what the practitioner is suggesting, it is, in my view, a mistaken understanding of the effect of the statutory provision and of the proposed arrangements which he has formulated. The fact is that it is a term of the proposed arrangements which he has formulated that the principal debt due to the bank will be written down to the value of the family home. That is an essential and integral part of the terms of the arrangements which he proposes. The write-down will endure not just for the duration of the arrangements but for the balance of the mortgage term. The question which arise here is whether that write-down has the effect that the means of Ms. Griffin and Mr. Griffin have been sufficiently brought to bear. On the face of the evidence before the court as to the surplus which will arise after the completion of the proposed arrangements, there was, in my view, a particularly heavy onus on the practitioner to justify and explain how he had come to the conclusion that it was appropriate to write-down the debt to market value. I can see nothing in the evidence which he has placed before the court in the course of the Circuit Court proceedings which justifies the extent of the write-down.
68. I fully accept that, following the successful completion of an arrangement, debtors should not, where possible, be confined to the reasonable living expenses recommended by the ISI. That is an issue which I addressed in my judgment in Lisa Parkin [2019] IEHC 56 and it is unnecessary to repeat that analysis here. However, it is difficult to see how Ms. Griffin and Mr. Griffin require a buffer of the order of €1,569.26 above the reasonable living expenses. While I appreciate that in the Lisa Parkin case, a reasonably generous buffer was accepted by the court, this was not intended to be a bench mark for what would be acceptable in all cases. In that case, I had a very significant concern that the issue in relation to the extent of the surplus had not been adequately flagged by the objecting creditor in the course of the Circuit Court hearing and therefore had not been addressed in any detail in either the affidavits filed by Ms. Parkin or by the practitioner in that case. In contrast, in the present case, the issue was raised very plainly by the bank in para. 8 of Mr. Gately’s affidavit filed in May 2018 and the point was specifically made by him that, even if 50% of that monthly surplus was made available, it would be sufficient to service payment of part of the amount which had been written down. The practitioner and Ms. Griffin and Mr. Griffin were each therefore on notice that this was an issue of concern to the bank and they failed to address it in any sufficient level of detail in response. In these circumstances, I have come to the conclusion that there is no sufficient evidence before the court which would allow the court to form the view that surplus income of the order of €1,596.26 per month is justified or reasonable. Similarly, there is no evidence to justify the extent of the write-down.
69. I appreciate that, in the course of the appeal, further evidence was delivered by Ms. Griffin and by the practitioner in response to the additional affidavit delivered by the bank with leave of the court. These affidavits go far beyond a response to the matters raised on behalf of the bank in its new affidavit. No leave was given for the delivery of such affidavits. Even if regard is given to these affidavits, they are at a level of generality which again falls far short of justifying the retention of the monthly surplus described above or the write-down of the principal sum due to the bank. While a large number of potential expenses in the future are listed in the affidavit (which may or may not arise), the explanation for the reduction in the principal sum is ultimately given in para. 32 of the practitioner’s affidavit in the following terms:-
“32. I say that an order to reach a sustainable and affordable payment, and to return the debtor to solvency, I had to reduce the debt, and the appropriate reduction was to €140,000. I say that this reduction was based on the age and means of the debtor and based on affordability. I say that fact the payment of interest only mortgage repayments over the 72 month term of the PIA would automatically result in a significant uplift in the monthly payments after the PIA for the remaining 168 month mortgage term. In this case the mortgage during the PIA amounted to €495.83 on an interest only basis increasing to €1,107.12 on a full capital and interest basis after the PIA”.
70. In my view this does not provide any rational or objectively justifiable basis for the reduction of the mortgage debt to €140,000. While the practitioner says that this is based on the age, means, and affordability of the debtors, he does not explain this in any way and, in particular, does not sufficiently explain why the debtors here need a buffer of €1,596.26 per month. On the face of it, that is a very generous buffer and requires a more detailed explanation. While reference is made to the potential for future medical expenses for Ms. Griffin, no attempt has been made to evaluate the likelihood that such expenses might arise in the future. In fact, no sufficient evidence has been given as to Ms. Griffin’s medical needs. In the circumstances, it seems to me that not only can I not be satisfied that the requirements of s. 115A (9) (b) (ii) have been satisfied but the same difficulty arises in relation to s. 115A (9) (f). In circumstances where the write-down of the mortgage debt has not been justified, it is impossible to conclude that a bank would not be unfairly prejudiced by the proposed arrangements.
Conclusion
71. In light of the considerations outlined above, I am unable to conclude that all of the requirements of s. 115A have been satisfied in this case. In those circumstances, it is not possible to make an order confirming that the proposed arrangements should come into effect. In reaching this conclusion, I am very conscious that I differ from the decision of the learned Circuit Court judge. However, I have had the benefit of more extensive submissions (both written and oral) than were made in the Circuit Court. I have also had more time to reflect on the arguments than was available to the learned Circuit Court judge.
72. At the same time, I am also conscious that more than a year has passed since the decision of the learned Circuit Court judge and that, in the meantime, the practitioner has taken steps to implement the arrangements which were the subject of the order made by the Circuit Court in July 2018. Regrettably, there is no facility available under the 2012-2015 Acts for the court to make adjustments to an arrangement that has already been voted on by creditors so as to correct or counter-balance any perceived unfairness. It is clear, on the basis of the evidence before the court, that it would be possible to formulate arrangements in both of these cases which would meet the requirements of s. 115A. The circumstances of persons such as Ms. Griffin and Mr. Griffin are precisely what the Oireachtas had in mind when enacting the 2012-2015 Acts. It should not be difficult to formulate proposals which would address the concerns outlined in this judgment while, at the same time providing a fair distribution to the other creditors of Ms. Griffin and Mr. Griffin. In this context, I do not know whether any steps might reasonably be taken which, with goodwill from all parties, might avoid the necessity to recommence the process. I believe it would be worthwhile adjourning the matter for a short period of time to see whether any such steps might be taken.
73. If it is not possible to avoid recommencing the process under the 2012-2015 Acts, it seems to me that there would be a good basis on which to apply to the Circuit Court for an order pursuant to s. 91 (3) of the 2012 Act to permit an application for a protective certificate to be made in advance of the twelve month period prescribed by s. 91 (1) (i). While it would obviously be a matter for the learned Circuit Court judge to form his or her own view on any such application, it seems to me that there are factors here outside the control of Ms. Griffin and Mr. Griffin which would make it just to permit them to make a new proposal for a personal insolvency arrangement. In this regard, I am struck by the fact that the counter-proposal from the bank was made at such a late stage that it was wholly impracticable for the practitioner to reformulate the proposals at that point. In light of the fact that proxies had already been received from creditors, it was entirely reasonable for the practitioner to take the step which he did. If the counter-proposal had been made in a more timely way, it would have highlighted the issue which became the focus of the hearing before me and would have allowed the practitioner to formulate proposals (in advance of circulation to creditors) which took account of the underlying complaint made by the bank in the email of August 2017. While the counter-proposal itself lacked reality, the complaint that the proposals then under consideration were unduly weighted in favour of the credit union was an issue that could have been taken on board and appropriate proposals prepared which provided for a fairer distribution as between the credit union on the one hand and the bank on the other.
74. In light of the considerations discussed in paras. 72 to 73 above, I propose, before making any order in this case, to adjourn the matter for a period of weeks to see whether any practical solution can be found which would avoid the re-commencement of the process. I will discuss with counsel what period of time should be allowed for that purpose. I should make clear that I am not confident that any such practical solution can be found but I believe it would be a pity not to allow an opportunity to the parties to explore whether a solution can be identified.
In Re O’Connor (A Debtor)
[2015] IEHC 320
JUDGMENT of Ms. Justice Baker delivered on the 21st day of May, 2015
1. This is an appeal from a decision of the Circuit Court of the 3rd October, 2014 made by Judge Enright, a specialist judge appointed for the purposes of applications under the Personal Insolvency Act 2012 (“the Act of 2012”), by which she upheld the objection of Bank of Ireland (“the Bank”) to the personal insolvency arrangement (“the PIA”) proposed by Joseph O’Connor, a debtor. The matter came on for hearing before me grounded on the documentation which was before the Circuit Court, and on lengthy legal submissions from counsel.
2. Before turning to the grounds of objection I briefly outline the facts.
Facts
3. The Bank claims that the debtor is indebted to it in the round sum of €280,000 in respect of which demand has been made. The debtor appointed Mitchell O’Brien, a Personal Insolvency Practitioner (hereinafter “the PIP”), for the purposes of making a proposal for a PIA pursuant to the provisions of the Act of 2012. No argument is made that the procedural requirements of the Act to appoint the PIP were not properly met.
4. The Bank’s debt comprises 22.2% of the total debt, and 70.1% of the secured debt of the debtor. Because the Bank is owed more than 50% of the secured debt of the debtor it had a blocking vote, and the PIA could not be approved without its support.
5. A notice of a meeting for the purpose of considering the PIA in the statutory form was sent to the Bank on the 8th July, 2014 for a meeting scheduled to be held at 11am on the 23rd July, 2014 at premises in Dungarvan, Co Waterford. The PIA was subsequently amended and the amended PIA was furnished to the Bank one day before the scheduled creditors’ meeting.
6. As is required by the legislation the PIP requested that creditors submit proof of debt within 14 days of the letter. Ulster Bank, one of the creditors, did not prove its debt, although its claim was included by the PIP for a dividend in the proposal put to the meeting. That inclusion is one of the grounds of objection raised by the Bank.
7. The Bank determined to vote against the proposal and emailed a proxy form to the PIP appointing him as its proxy to vote against the proposal at the meeting. The email was sent just before 4pm, the deadline, on the 22nd July 2014.
8. The chairman of the creditors’ meeting refused to accept the proxy instrument.
9. An officer of the Bank, Ms Ormiston, attended at the creditors’ meeting to vote in person on behalf of the Bank. For that purpose she presented evidence of her authorisation to act on behalf of the Bank to the PIP who acted as chairman of the meeting. The PIP rejected her evidence and did not permit her to vote.
10. Thus the Bank’s blocking vote was not cast against the PIA which was deemed to have been approved pursuant to the provisions of s.108 (8) of the Act.
11. By notice of objection dated the 1st August, 2014 the Bank notified the Circuit Court, the Insolvency Service of Ireland and the PIP of its objection to the PIA coming into force on the five grounds set out therein.
12. The application to approve the PIA was heard by Judge Enright on the 1st September, 2014. The objection of the Bank was grounded on the affidavit of Ms Anthea Ormiston sworn on behalf of the Bank on the 28th August, 2014. Written submissions were furnished to the court, which having reserved its judgment to the 3rd October, 2014, upheld the Bank’s objections.
13. The effect of the Circuit Court decision is that the PIA procedure has come to an end and the debtor no longer has the benefit of a protective certificate. Section 114 (3) of the Act of 2012 provides that:-
“Where the appropriate court upholds the objection to the Personal Insolvency Arrangement, the Personal Insolvency Arrangement procedure shall be deemed to have come to an end, and the protective certificate issued under section 95 shall cease to have effect.”
14. It is from this determination of the Circuit Court that the debtor has appealed. It is agreed that four issues arise for determination by me on the appeal as follows:-
1) Whether the proxy vote of the Bank was properly excluded by the chairman.
2) Whether the Bank was unlawfully prevented from casting a vote personally at the creditors’ meeting.
3) Whether the creditors’ meeting ought to have been adjourned having regard to the variations in the proposal.
4) Whether Ulster Bank was improperly included for a dividend despite not having submitted proof of debt.
Procedure on appeal
15. It fell first to me to determine the appropriate means by which this appeal would be prosecuted. The Act of 2012 is silent on the mode of an appeal, and indeed on the entitlement to an appeal. There is nothing however to displace the provisions of the s. 37 (1) of the Courts of Justice Act 1936 which provides in all cases an appeal from the decision of the Circuit Court:
“An appeal shall lie to the High Court sitting in Dublin from every judgment given or order made (other than judgments and orders in respect of which it is declared by this Part of this Act that no appeal shall lie therefrom) by the Circuit Court in any civil action or matter at the hearing or for the determination of which no oral evidence was given.”
16. The appeal, being an appeal from a decision of the Circuit Court heard other than on oral evidence, is an appeal to the High Court on Circuit sitting in Dublin. Section 37 (2) of the Courts of Justice Act 1936 provides that an appeal shall be heard and determined by one Judge of the High Court sitting in Dublin:-
“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.”
17. Henchy J. in Northern Bank Corporation Ltd. v. Charlton & Ors. [1979] IR 149 held that the expression “re-hearing” for the purposes of s. 37(2) meant that that the matter would be determined on the evidence already heard in the Circuit Court “by examining documentary material, particularly a written version or report of the evidence”, and that only in “exceptional cases” would “fresh or re-presented evidence” be received.
18. Furthermore, the appeal is confined to the grounds already argued in the Circuit Court, and that this is clear by analogy with appeals to the Supreme Court from the decision of Denham J. in Blehein v. Murphy & Ors. [2000] 2 IR 231 at p.240:-
“There being no exceptional reasons, the additional grounds of appeal, being matters not argued in the High Court, should not be permitted.”
19. Kearns J explained the policy behind this reasoning in Quinn v. Mid Western Health Board & Anor. [2004] I.R. 1 at p.19:-
“parties to litigation must bring forward their whole case and each and every point which properly belongs to the subject of litigation in the course of trial and not seek to do so at a later time.”
20. No application was made by either party to adduce further evidence than that available before the Circuit Court.
21. The second question that fell for determination was how the appeal should proceed. Following argument, counsel for both parties agreed that, while formally the debtor ought to present the case, the only matters of substance before me on the appeal, and the only matter of substance before the Circuit Court, were the four points of objection raised by the Bank, and no argument was made that the formal proofs for the approval of the PIA were in order. Accordingly the Bank presented its grounds for objection and the debtor responded.
22. Counsel facilitated the hearing considerably by narrowing the issues to facilitate the management of the appeal process.
23. Before considering the questions raised in the appeal I briefly outline the provisions of the legislation with regard to the holding of a creditors’ meeting and procedures at such a meeting.
The Creditors’ Meeting
24. The scheme of the legislation provides for the preparation by the PIP of a proposal for a PIA which is to be considered at a meeting of creditors.
25. Section 106(2) of the Act of 2012 provides for the giving by the PIP of at least 14 days’ written notice of the meeting, and s.107 sets out the documents that must be given to creditors when a creditors’ meeting is summoned.
26. Section 108(1) provides for voting rights and mandates as follows:
“A vote held at a creditors’ meeting to consider a proposal for a Personal Insolvency Arrangement shall be held in accordance with this section, section 110 and regulations made under section 111.”
27. Section 111 enables the Minister for Justice and Equality to make regulations relating to the holding of such meetings, and the Minister did so make the Personal Insolvency Act 2012 (Procedures for the Conduct of Creditor’s Meetings) Regulations 2013, S.I. 335/2013. The Regulations provided for the voting process and the appointment of proxies to vote at a meeting.
28. The objections relate primarily to the interpretation and application by the PIP of the requirements of these Regulations in the conduct of the meeting and the counting of votes.
29. I turn now to consider the first objection, that with regard to the proxy vote.
The Exclusion of the Proxy Vote of the Bank
30. Regulation 7(1) of the Regulations of 2013 provide for the giving of a vote by proxy. The regulation is admirably short:
“Votes at a creditors’ meeting may be given either personally or by proxy.”
31. The notice summoning a creditors’ meeting is required by 7(2) to be accompanied by an instrument under which a creditor may appoint a proxy to attend and vote on behalf of that creditor, called in the Regulation “an instrument appointing a proxy”.
32. The Bank, having received notice of the creditors’ meeting, sought to vote by proxy. No issue arises as regards the delivery by the Bank of a completed proxy form prior to 4pm on the day before the scheduled creditors’ meeting. Some email correspondence occurred between the Bank’s representative and the PIP as to the time for admitting a proxy form, but the question of time limits is not now in contention. On 22nd July, 2014 an instrument creating a proxy vote was emailed by the Bank’s representative, Jane McDevitt, directing a no vote on the proposal.
33. The chairman of the meeting declined to accept the instrument creating the proxy and deemed it to be invalid, and not completed pursuant to the statutory requirements. By email of 22nd July, 2014 the PIP wrote to the Bank notifying it of this view, and furnishing the legal advice received on which the view was based. In that context the Bank appointed a person to attend and vote personally at the meeting the following day.
34. Before considering the detailed reasons for rejection, it is convenient that I set out the provisions of the Regulations providing the formal requirements for a proxy.
The Regulation providing for a proxy
35. Regulation 7(2) provides that the instrument appointing the proxy:-
“shall be in the form set out in the Schedule to these Regulations or in such form, substantially to like effect, which the chairperson in his or her sole discretion shall allow.”
36. Regulation 7(3) provides:-
“An instrument appointing a proxy shall be completed in writing under the hand of the creditor or, if such creditor is a company or other body corporate, under the hand of the secretary or other person duly authorised by the company or other body corporate.”
37. Regulation 7(5) provides:-
“The chairperson may, unless evidence to the contrary is shown and the chairperson has notice of this evidence, accept a completed instrument appointing a proxy which has been delivered in accordance with these Regulations as evidence that the appointee named therein has been validly appointed by the creditor concerned.
The proxy
38. The proxy form actually completed by the Bank is as follows, and I use the upper case format employed:
INSTRUMENT APPOINTING A PROXY IN THE MATTER OF A CREDITORS’ MEETING PURSUANT TO THE PERSONAL INSOLVENCY ACT, 2012 AND THE PERSONAL INSOLVENCY ACT, 2012 (PROCEDURES FOR THE CONDUCT OF CREDITORS’ MEETINGS) REGULATIONS 2013
AND IN THE MATTER OF JOSEPH O’CONNOR
OF Benedine, Nenagh, Co. Tipperary, A DEBTOR
Mitchell O’Brien OF the Insolvency Resolution Service, Garraun Fadda, Dungarvan, Co. Waterford is hereby appointed agent and proxy for the undersigned in the above matter, to represent and vote for the undersigned against (No) the approval of a proposal at the creditor’s meeting to be held in respect thereof on 23rd July, 2014.
For and on behalf of the Governor and Company of the Bank of Ireland ANTHEA ORMISTON (Signed) SIG8150
SIGNATURE OF WITNESS (Signed)
22nd July, 2014
39. It is accepted that Ms. Ormiston was duly authorised by the Bank to sign the proxy form by and on behalf of the Bank, and the reference “SIG8150” is her authorised signatory number.
Grounds of Exclusion
40. However the debtor argues that the instrument creating the proxy is invalid and incomplete for three reasons: first it does not show on its face the fact of authorization; second the chairman was required to seek evidence that Ms Ormiston was an authorised signatory to execute the instrument appointing the proxy for and on behalf of the Bank; and third he has a discretion to exclude the proxy.
Ground one: the form of the instrument
41. The debtor relies on case law concerning the use of proxies in corporate insolvency matters. Reliance in particular is placed on the judgment of Laffoy J. in In Re CED Construction Ltd. (in voluntary liquidation) [2011] IEHC 420 which identifies the mandatory nature of the statutory provisions with regard to proxy voting by a corporate creditor at a meeting of creditors. Order 74, rule 75 of the Rules of the Superior Courts deals with proxy votes at a creditors’ meeting convened under s.266 of the Companies Act, 1963, for the purpose of passing a resolution to wind up a company. The rule provides as follows:
“A creditor or a contributory may vote either in person or by proxy. Where a person is authorised in manner provided by section 139 to represent a corporation at any meeting of creditors or contributories, such person shall produce to the Liquidator or the chairman of the meeting a copy of the resolution so authorising him. Such copy shall either be under the seal of the corporation or be certified to be a true copy by the secretary or a director of the corporation.”
42. Laffoy J. in considering that rule said the following:-
“As is clear from the statutory provisions and rules outlined above, there are a number of means available to a corporate creditor to have its wishes in relation to the appointment of the liquidator taken into account at a s.266 convened meeting. It may act through a person duly authorised in the manner prescribed in s.139(1) b in which case the corporate creditor is deemed to be at the meeting in person, but, in compliance with rule 74, the authorised person must produce a copy of the relevant resolution either under seal or certified by the secretary or director of the corporation. Alternatively, the corporate creditor may vote by proxy, but, in that event, it must comply with the mandatory requirements under rule 82(1) in relation to lodging the instrument of proxy not later than 4pm on the previous day. Further, the instrument must be in one of the two forms prescribed in rule 75, which means that in the case of a corporation the form of proxy must be under its common seal or under the hand of some officer duly authorised in that behalf and the fact that he is so authorised must be stated.
43. Laffoy J. quoted the earlier decision of In Re Stainless Pipe Line Supplies (Ireland) Limited (in voluntary liquidation) [2010] IEHC 318 as authority for the latter proposition.
44. As is clear from that extract Laffoy J. considered a number of mandatory requirements arose by virtue of the proxy rules relating to creditors’ meetings in the context of corporate insolvency and the appointment of a liquidator. The proxy form must be in one of the two prescribed forms, and where the creditor is a corporation a form of proxy must be either under its common seal or under the hand of some officer duly authorised and, and this is the factor which is identified as missing in the proxy advanced by the Bank in this case, the fact of authorisation must be stated on the instrument creating the proxy itself.
45. Counsel for the debtor argues that the proxy form advanced by the Bank did not contain a declaration that Ms. Ormiston was an authorised person. That she was duly authorised is not now in doubt, what is argued is that the proxy form ought to have, but did not, contain a statement that she had been duly authorised.
46. Counsel for the debtor argues that in an interpretation of the Regulations for the purpose of the personal insolvency legislation the court must have regard to the authorities on the form of a proxy in the context of company legislation
47. Counsel for the Bank argues that the personal insolvency Regulations are clear, and do not fall to be interpreted in the context of the complex and mandatory nature of the corporate insolvency rules. He argues that the personal insolvency legislation is a complete statutory code, and that it would be incorrect to interpret the provisions of that code, and the Regulations made hereunder, and in particular the Regulation which provide the form of proxy, in the light of the case law in corporate insolvency, and that the new statutory personal insolvency code ought not to be trammelled by the jurisprudence in incorporate insolvency.
48. In the light of the argument I turn now to examine the Act of 2012
The Act of 2012
49. The preamble to the Act describes it as an Act “to amend the law relating to insolvency”, to amend the Bankruptcy Act 1988, and to provide for the establishment and functions of the Insolvency Service of Ireland. The recited objectives were to “ameliorate the difficulties experienced by debtors in discharging their indebtedness due to insolvency”, and “to enable creditors to recover debts due to them by insolvent debtors to the extent that the means of those debtors reasonably permits, in an orderly and rational manner without recourse to bankruptcy”.
50. The legislation states as its purpose the regulation of personal, and not corporate, insolvency and the Act expressly provides that the option of personal insolvency be considered as an alternative to bankruptcy. The legislation proposes an “orderly and rational” means by which both creditors and insolvent debtors may regulate their affairs.
51. There is nothing in the legislation that links any of its provisions to the Companies Acts, although there are a number of express references in the body of the legislation to the Bankruptcy Act 1988. I consider that the legislation provides a complete and new code by which an insolvent debtor may make binding arrangements with his or her creditors, and the Circuit Court, and in limited circumstances the High Court, has a jurisdiction to give directions with regard to certain matters, to issue a protective certificate, and ultimately to approve the coming into affect of a PIA following its approval of a proposal for such an arrangement by a creditors’ meeting.
52. The legislation fully regulates the procedures at a creditors’ meeting. It would be fair to say that the Act and the structures that it creates are, in relative terms, less complex and burdensome than those found in either the old, and to some extent the current, bankruptcy regime or those regulating corporate insolvency. In its form the legislation is intended to be a self-contained and new insolvency regime, and it is expressly sought that the regime be rational and orderly. While there is nothing in the legislation that expressly mandates that the procedure be either cost effective or speedy, the Regulations made under the Act prescribe the fees of the PIP, the form of prescribed financial statements, the power of the Personal Insolvency Service of Ireland to fix levels of reasonable expenditure etc., and taken together they establish a regime the clear purpose of which is to facilitate insolvent personal debtors whose means are clearly limited. In that regard I am fortified by s. 147 of the Act 2012 by which Court has a discretion to defer a bankruptcy petition, presumably with the aim of engaging the less burdensome procedures established by the Act.
53. Even without consideration of the purpose of the legislation it seems to me that the correct approach must be to consider whether the Regulation providing for a proxy is clear on its face.
54. The Regulations made under the 2012 Act, and in particular Reg. 7 of S.I. 335/2013 which I quoted above, while it does mandate that the instrument creating the proxy be in the form set out in the schedule, in its express terms quite clearly permits of a departure from that form provided the document is “substantially to like effect”. Thus it could not be said that the Regulation required in all cases that the statutory form and no variation thereof was always mandated. A variation, provided it is of the same substance and effect as the statutory form, is admissible.
55. I consider that Reg. 7(2) does not create a mandatory form of proxy, and permits of a proxy form which in its substance and effect sufficient to constitute authority to a person to attend and vote at a creditors’ meeting for the purpose of considering a proposal for a PIA.
56. Further Reg. 7(3) is quite clear and imposes a number of statutory and mandatory requirements as to the means of execution of the proxy form. These can be set out as follows:-
a) The instrument must be in writing.
b) The instrument must be under the hand of the creditor, if the creditor is a natural person.
c) If the creditor is a company or other body corporate it must be under the hand of the secretary or another person
d) Such other person, i.e. a person other than the company secretary, must be duly authorised by the company or body corporate but there is no express mandatory requirement that the instrument state the fact of authorisation.
57. Order 74 Rules 74 and 75 of the Rules of the Superior Courts, which provide for a voting by proxy at a meeting of corporate creditors is mandatory and with regard to each of its requirement the word “shall” is used. The form of the proxy is mandatory by virtue of it being so designated in O.74 r.75 itself, and not by virtue of any general principle arising in the common law, whether in insolvency generally or otherwise, which mandates a particular form of instrument. This statutory source of the mandatory nature is identified by Laffoy J. in In Re Michael Madden Quality Meats Ltd (in voluntary liquidation) [2012] IEHC 122 at paragraph 5 where she held that the company had not completed the form in the manner stipulated in appendix M to the relevant rules “which by virtue of Rule 75 is mandatory”.
58. In the interpretation of the Regulation and in the absence of ambiguity the words must be given their plain meaning.
59. Furthermore, regard must be had to the well established requirement that a legislative scheme inform interpretation. At paragraph 12.11 of Dodd Statutory Interpretation in Ireland (Tottel Publishing, 2008) the author makes the following general statement, which I adopt:-
“The interpreter must consider the statutory scheme as a whole, the part played in that scheme by the provision to be interpreted and the meaning, intention and objective of the legislation concerned.”
60. In Keane v. An Bord Pleanala [1997] 1 IR 184 Hamilton CJ stated at p.215:-
“In the interpretation of a statute or a section thereof, the text of the statute or section thereof is to be regarded as the pre-eminent indication of the legislator’s intention and its meaning is taken to be that which corresponds to the literal meaning.”
61. Henchy J. in State (Elm Developments) v. An Bord Plenala [1981] IRLM 108 at p.110 made the following observations:
“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.”
62. Counsel for the debtor points to the dicta of Henchy J. as suggesting that the scheme of Regulation 7(2) ought to be seen as mandatory. He is incorrect in this, and the dicta to my mind requires the scheme as whole to be looked at, and points indeed to a requirement to look to the face of a statue or statutory instrument to ascertain whether a particular form is mandatory or merely directed.
63. I adopt the dicta of Lafoy J. in Re Michael Madden Quality Meats Ltd. (in voluntary liquidation) that to ignore the mandatory nature of O.74 r.75 would be to surrender the rule “nugatory or superfluous”, and by analogy to create a mandatory requirement, when one is not required by the clear words of the Regulation, as is the case in Reg. 7(2), would be to ignore the language of the Regulation and make its broad approach to substance and not form nugatory or superfluous.
64. In my view the provisions of Reg. 7(3) are clear and do not admit of an interpretation which would have the effect that the particular form in the appendix to the Rule is mandatory, and the Rule read in its entirety has the opposite effect and points to the substance and not the form of the instrument as being the true matter in consideration. There is nothing in the Regulation which requires the fact of authorisation to be stated in the instrument, and one ought not to be implied, whether from the wholly different operative statutory regime or otherwise.
The second point: evidence of authority
65. The second point counsel makes is that the chairman was entitled to threat the proxy as invalid as he had no evidence of the means by which Ms. Ormiston was authorised by the Bank to act on its behalf in executing the instrument creating the proxy. Again the starting point is the Regulation, specifically 7(3) and counsel for the debtor argues again by analogy from the law of corporate insolvency. He points to this law as illustrative of a particular problem which it is argued would arise where evidence of authorisation was not furnished to a chairperson prior to the creditors’ meeting. Counsel for the debtor argues that the legislature could not have intended that an instrument creating a proxy, which was sufficient in form, can obviate the requirement that a chairperson seek evidence that it was executed by a person duly authorised to do so.
66. Counsel for the Bank points to the Regulation itself as evidence of the statutory intent that no requirement of evidence of the source of authorisation is required.
67. Regulation 7(5) governs the power of a chairperson to accept a completed instrument appointing a proxy this provides as follows:-
“The chairperson may unless evidence to the contrary is shown and the chairperson has notice of this evidence, accept a completed instrument appointing a proxy which has been delivered in accordance with these Regulations as evidence that the appointee named therein has been validly appointed by the creditor concerned.”
68. Counsel for the Bank suggests that Reg. 7(5) creates a presumption that a completed instrument, provided it has been delivered in accordance with the Regulation, is presumed to be valid and that the chairperson may accept the validity of the document without further question, and is not put on enquiry.
69. It is argued in essence that the provisions of Reg. 7(5) are protective of the role of the chairman and entitle him or her to accept a document as substantially valid without further enquiry, and that to so permit is consistent with the purpose and intent of the legislation to create a rational and orderly means of dealing with personal insolvency.
70. In other areas of law the legislature has recognised and established such a presumption, and for example s. 61 of the Succession Act, 1965 provides a presumption in favour of a purchaser from a personal representative that he or she is acting correctly and within powers concerned within their powers. Equally s. 53 of that Act provides that a conveyance of land by a personal representative shall be conclusive evidence of title, and has been interpreted of being protective of purchasers and limiting the number of enquiries that need to be made. These are statutory examples of such a presumption or statutory protection, and I consider that Reg. 7(5) creates a similar class of presumption, with similar protective consequence and effect. Counsel for the debtor however, argues that there is no evidential presumption, and submits that the chairman of a creditors’ meeting cannot be expected to rely on his or her own personal knowledge of the authority of the person executing the instrument. He relies on the decision of Laffoy J. in In Re Mountview Foods Ltd. (in voluntary liquidation) [2013] IEHC 125 where Laffoy J. held that the chairman of a creditors’ meeting in the context of a resolution to wind up a company had no discretion to accept the instruments notwithstanding that he was in a position to say that he personally knew each of the persons who had signed the proxy forms and that each of them “owned” the relevant companies. Laffoy J. held that such discretion could not arise, and she did so because of what she regarded as the mandatory requirements of O.74 r.75 which I have considered above.
71. I reject that argument and I do not consider that the word “may” in Reg. 7(5) imports a discretion, but rather it seems to me to that the word is enabling i.e. the chairperson is enabled, permitted, or allowed to accept an instrument which has an appearance of being valid as sufficient evidence that the person executing the instrument has been validly appointed by the creditor concerned to effect the instrument. The enabling provision permits the chairperson to treat an appointee as having been validly appointed and does not give discretion to the chairperson to accept or reject a validly constituted instrument. Further, the Regulation creates a presumption of validity such that in the absence of evidence to the contrary a chairperson is not put on enquiry, and may accept an instrument if it is formally or substantially valid on its face.
The third point: discretion
72. A chairperson of a meeting does have discretion to consider the substance of the instrument creating the proxy, but this is contained in 7(2) which allows a chairperson “in his or her sole discretion” to allow a vote by proxy where he or she is satisfied as to either the form or the substance and effect of the instrument proffered.
73. Thus it seems to me that the chairperson of the creditors’ meeting does have the discretion to consider whether the instrument creating the proxy is adequate and effective for its purpose, and that discretion is one which enables the chairperson to look to the form or, if necessary or desirable, to the substance. This is not a broad discretion to exclude a proxy other than for want of effect. I do not consider on the other hand that Reg. 7(5) creates a requirement that the chairperson seek evidence of authority, but rather that it empowers the chairperson to accept that a nominee is validly authorised, and may do so, and is empowered to do so, unless evidence to the contrary is shown which calls that authority or the validity of that appointment into question.
74. I do not consider that Reg. 7(5) gives a broad discretion to a chairperson of a meeting to refuse to accept an instrument of proxy, and his discretion is confined to considerations of the form, substance and effect of the instrument under Reg. 7(2).
Application to the Facts
75. The evidence before the Circuit Court was that at the creditors’ meeting there was no evidence that could have led the chairman to believe that Ms Ormiston was not the validly appointed nominee of the Bank with authority to execute the instrument creating the proxy. Email correspondence with Ms. Ormiston was exhibited in the Circuit Court so the PIP knew of the role she played in the process, nor has the PIP averred in any of the affidavits that he had reason to believe, or had evidence that led him to be concerned, that Ms. Ormiston was not an authorised signatory of the bank. As a matter of fact there was nothing before the chairperson of the meeting that would have alerted him to any doubt as to the authority of Ms. Ormiston, and no evidence was before the Circuit Court that such was the case.
76. I consider that the Regulations do not require proof of the fact of authority to execute the instrument creating the proxy, and that accordingly the chairperson of the meeting was entitled to accept the proxy vote. Nothing was before the chairperson which could have or did in fact put him on notice of any frailty in authority. It was not necessary for him in the circumstances to look outside the proxy form itself which was valid on its face.
Conclusion
77. Thus it seems to me that the following findings flow from the above.
a) The instrument creating the proxy was valid in form and substance.
b) The instrument therefore was effective.
c) The chairperson had no discretion to exclude the proxy vote in the circumstances.
d) There was no evidence to suggest that want of authority on the part of Ms. Ormond was before the chairperson of the meeting, and therefore as he had no reason to doubt the effectively and validity of the instrument. He was not put on enquiry.
78. Thus in the circumstances the chairperson of the creditors’ meeting was not correct to exclude the Bank’s vote by proxy.
79. Accordingly, in answer to the first question on this appeal, I consider that the proxy vote was unlawfully excluded from voting at the creditors’ meeting. Accordingly, the first objection of the Bank is shown. As this is determinative of the issue before me I do not consider it necessary or desirable to answer or to deal with the other grounds of objection, which arise only if the proxy vote was not operative.
80. Counsel for the debtor specifically requested that I deliver judgment on each of the four points of objection but having regard to the fact that I heard the appeal as a judge of the High Court hearing a Circuit Appeal, and, partly in recognition of the dicta of Kearns P. in Wicklow County Council v. Kinsella & Anor. [2015] IEHC 229 I consider that the precedential value of any findings or determinations on the other grounds would be limited.
Re JD [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 [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 [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, 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.
Re Ennis [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.