© Grant Thornton Ireland. All rights reserved. Personal Insolvency Bill 2012 Michael Bolger – Head of Personal Insolvency With legal opinion from: Barry

© Grant Thornton Ireland. All rights reserved.

Personal Insolvency Bill 2012

Michael Bolger – Head of Personal Insolvency

With legal opinion from:

Barry O NeillPartnerEugene F. CollinsAugust 2012

Personal debt in Ireland

Legal Overview of Bill

Debt Relief Notice (DRN's)

Debt Settlement Arrangements (DSA's)

Personal Insolvency Arrangement (PIA's)

Case studies

Questions and answers


Debt pathways

PRE-CRISISGrowth and ambition

TIPPING POINTSCONTACT WITH MABS

(ONGOING CRISIS)

POST-CRISIS EXPECTATIONS –

STRUCTURED SOLUTIONS (eg DSA,PIA, pay off the

debt, Bankruptcy) - Optimism

Time

Well being

Positive future: New lifestyle free from debt. But risk of regression to pre-crisis, repetition of past failures (re-offending)

DEBT PROGRESSIVE

DECLINE

Distress Debt

Debt psychologySymptoms

Physical/Somatic

• SLEEP

• APPETITE

• IBS:

• BLOOD PRESSURE:

• IMMUNE SYSTEM: weakened

• LIBIDO:

• SKIN:

• ABUSE: alcohol (smoking, drugs)

Psychological

• EMOTIONAL:

• COGNITIVE:

• SOCIAL:

• CULTURAL:

– stigma

– blame banks, government, immigrant groups

Advice tipping points

ActionAction

•Advice

•CAB

•Online search

•Grant Thornton contact

DenialDenial

• Ignoring bills

•Hiding from partner

•Escapism

•Loss of utilities threat of bailiffs

•Partner pressure

•No or limited income

•Paying redundancies, etc.

Realisation of need

Realisation of need


Loan products which have substantially increased since 2003:

Unsecured 2003 2011

Personal loans 23,651m 19,908m

Credit cards 1,500m 2,700m

Secured

Residential mortgages 45,527m 115,089m

Other mortgages (buy to let) 7,161m 24,238m

Total (including all loans) 77,839m 161,935mSource: Central Bank Report June 2011


Private residential mortgage market in Ireland:

Irish Private Residential Mortgage Market

Mortgages Total value Arrears > 90 days

Arrears <90 days

Total private residential mortgages in arrears

30 June 2012 761,533 €112bn 83,251 45,165 128,416

10.9% 5.9% 16.9%

Source: Central Bank Report Aug 2012

Note: • The above figures do not include buy to let mortgages • Total arrears amount to €1.5bn for private residential mortgages (includes <&>90 days)

Referral: MABs

New Client Accommodation Type Q1 Q2 Q3 Q4 Total %

Homeless 8 2 8 - 18 0.08%

Hostel 15 8 8 3 34 0.15%

Mortgage 2,672 2,496 2,690 2,099 9,957 44.33%

Other 299 317 412 422 1,450 6.46%

Owned 266 248 253 211 978 4.35%

Rented LA 1,071 955 1,010 837 3,873 17.24%

Rented PR 1,252 1,197 1,133 1,002 4,584 20.41%

Residential 6 11 4 4 25 0.11%

Shared Ownership 39 39 47 21 146 0.65%

Sheltered Housing 19 18 16 13 66 0.29%

Social Housing Scheme 92 48 61 75 276 1.23%

Tenant Purchase 8 13 11 8 40 0.18%

With Family/Friends 2 22 66 47 137 0.61%

With Parents 300 238 199 141 878 3.91%

Total 6,049 5,612 5,918 4,883 22,462 100.00%

Unemployment Black spots

Source: census 2011


What is the age profile of the debtors- MABS

New clients age analysis Q1 Q2 Q3 Total %

15-18 9 4 4 17 0.1%

19-25 393 396 370 1159 6.6%

26-40 3123 2928 2997 9048 51.6%

41-65 2431 2207 2406 7044 40.2%

Over 65 93 71 102 266 1.5%

Total 6049 5606 5879 17534 100%

Source: MABS report Nov 2011 www.mabs.ie

Personal Debt in Ireland

Profile (UK)

The typical debtor (UK) who enters IVA process…• average salary £21-24k (median average pay

£21,221)• 63% home ownership• between 50-60% will be aged 25-44• 90% will be employed• 70% male to 30% female• c.50% of new applicants are married.


UK/Ireland comparison- Ireland population circa 9% of UK

Comparison Ireland UK

Disposable income to household debt – a debt to income ratio of 176% means for every €10,000 of disposable income earned, €17,600 of debt is outstanding

176% 161%

Debt per adult €54,535 £24,636

Unsecured debt €25 billion £216 billion

Cost to society of problem debt per year Unknown £21 billion


UK personal insolvency volumes

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 p Q3

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

5000

10000

15000

20000

25000

IVA

DROs

BKYs


Comparison with UK

Ireland UK

Workout with secured property

Personal Insolvency Arrangement (PIA)

Individual Voluntary Arrangement (IVA)

Workout without secured property

Debt Settlement Arrangement (DSA)

Individual Voluntary Arrangement (IVA)

Bankruptcy Bankruptcy – 3 Years Bankruptcy – 1 Year

No assets/no income Debt relief notice Debt relief order

Debt Journey

• Acceptance of the current situation

• Need for debt advice

• Understanding the options available

• Creditor containment

• Debt prevention


•Context•Radical


•New law•Change


• New• Debt Relief Notice• Debt Settlement Arrangement• Personal Insolvency

Arrangement


•Court• Insolvency Service

• “Intermediary”


•PIA



•Court?•Circuit Court•High Court•€2.5million+



•Joint Proposal



•Once



•Domiciled•Residence (1 Year)



•€3M (Waiver?)•Home•6 Years



Residence

•“Co-operated”•6 Months•Process



Process

•No agreement•Unwilling



Process

• Confirmation• Belief• Arrangement• Not solvent• 5 years



•70 Days•No Action



•Judgement Mortgage



•Value•Agree•Expert



•Accounting

•Records



•Sale•Surrender•Retention



•Residence



•Uplift



•Meeting



•65%•50%•Connected



•Vote?•Value•or•Debt



Debt Relief Notice (DRN)


Debt relief notice (DRN's)-

Key eligibility criteria• Unsecured debts• debts < €20k• disposable < €60 per month• assets < €400 (can be increased to €1,200 if for motor

vehicle/furniture) • 3 year protection • if >50% of debt paid DRN will cease to have affect• 75% of debt must be > 6 months


Debt relief notices (DRN's)-

Typical creditors/debt• credit/store cards• credit union• personal loan/overdraft• utility bills


Debt Settlement Arrangement (DSA's)


Debt Settlement Arrangement(DSA's)-Key eligibility criteria • domiciled/place of business in Ireland (12 months)• provide prescribed financial statement (affidavit)• debts > €20k (no max)• unsecured debt only • 5 year period (with possible 1 year extension)• Personal Insolvency Practitioner (PIP) must be of the

opinion that debtor is insolvent, with no likelihood of solvency in the next 5 years

• all creditors/debts will be treated on a pro rata basis• once in a lifetime only


Debt Settlement Arrangement(DSA's)

Typical debts/creditors• personal guarantees• credit union loans• personal loans/overdrafts• credit/store cards

Protective Certificate• 70 days possible extension of 40 days• "creditor shall not terminate or amend that agreement" under 56 (1) F (i

& ii) - Implications???• "shall not operate to prevent a creditor taking actions as respects

another person who has guaranteed the debts of the debtor" –under 56 (4) implications for guarantors??


Process map - DSA

Creditor will receive 14 days

notice of creditors meeting (pack will include proposal,

prescribed financial

statement) from PIP

Creditor will forward proof of debt and either

the Creditor or an appointed agent

will liaise with PIP on what terms are acceptable prior

to creditors meeting.

Creditor or representative

will vote to accept or reject

the proposal (either in

attendance or by proxy)

The debtor will meet with PIP.

PIP will formulate proposal based

on representations

made and information

provided

70 days protective cert

*(V imp that this phase is

streamlined to keep costs to a

min)


Process map - DSA

Phase 2 - if rejected

If proposal is not approved by 65%

of the creditors present

the process with the PIP will finish

creditor may continue to

pursue debtor as was the

case prior to the process beginning


Process map - DSA

Phase 2 - if approved

If proposal is approved by 65% of the creditors present

Creditor will receive a proposal

document (contract) from

PIP;

Creditor will instruct PIP of account details

& payment preferences

Creditor will receive

payments quarterly & an

annual statement

from PIP on the

performance of the account;Debtor will be

discharged after 5 years if

compliant unless a variation

Creditor will forward proof of debt and either the Creditor or an appointed

agent will liaise with PIP on

what terms are acceptable prior


If proposal is approved by 65% of the creditors present

If there is a material

change in the debtors financial

circumstances he/she is

obligated to inform the PIP of same and a

variation proposal will be submitted



annual statement from

PIP on the performance of

the account;Debtor will be

discharged after 5 years if compliant


Process map- DSA

Phase 3

If there is a

variation

Creditor will receive14 days notification of a

variation meeting and a

variation proposal

document from the PIP

Creditor will vote to approve or

reject variation- If 65% of creditors (present) vote to accept proposals All creditors will

be bound. Debtor will be

discharged after agreed however

ability to increase by 1

year


Process map - DSA

Phase 4

If Variation Rejected

The process with the PIP will finish

Administration to finalise same



• obtaining approval– approval required by 65% of creditors value who voted at meeting– connected or preferred creditors not entitled to vote– rejection = lifting of protective order– if no creditor votes DSA is approved– appeals process by aggrieved creditors through Circuit Court– variation to proposals allowed if accepted by 65% of creditors

• successful DSA means– no creditor can persist in bankruptcy petition– no creditor can commence legal proceedings for recovery of debt– no action can be taken by enforcement officer to enforce a judgement– debtor is discharged from remaining debts owed

• certain debts excluded– court order in family law proceedings / damages in respect of personal injury /

Proceeds of Crime debts / debts obtained through fraud



• debtor duties in DSA– fully cooperate in the process including providing all relevant information and

documents to the PIP – debtor must supply information on all assets and liabilities (including contingent or

disputed), incomings, outgoings– inform the PIP of any changes in his circumstances (such as increase in income)– not to obtain credit above a prescribed amount without disclosing the fact that they

are subject to a DSA– not to engage in any business under a name other than that in which DSA has been

registered• criminal offence for a debtor to

– provide false or incomplete representation in regard to statement of affairs– concealing or disposing of property– obtaining credit above allowed limits


Personal Insolvency Arrangement (PIA's)


Personal Insolvency Arrangements (PIA's) Key eligibility criteria

• Similar to DSA- with a number of key exceptions• Debts > €20k• PIA ceiling €3m (can be increased if all creditors agree)• Secured debt (unsecured debt can also be included) • 6 Year period (with possible 1 year extension) • a PIA must be supported by at least 65% of creditors and at least 50%

of secured creditors and 50% of unsecured creditors in terms of value• must have worked with the Mortgage Advice Resolution Process

(MARP) for at least 6 months (unless PIP is of the opinion no reasonable chance of solvency through the proposed process)

• "co-operated for a period of at least 6 months with his/her secured creditors"


Personal Insolvency Arrangements (PIA's)

Mortgage Arrears Resolution Process (PPR):• Code introduced 1 January 2011 • encourages open communication & co-operation• lender- assess case• lender – deliver workable options• if co-operation- 12 months protection from

repossession



Typical debts/creditors• principle private residence mortgages• Investment Property- Individual/Partnerships• buy to let mortgages• Personal Guarantees• personal loans• credit unions• credit cards



Interaction with secured creditors• secured creditor should carry out good faith valuation of

property, If any disputes arise on valuation an Independent Valuation expert will be appointed and his/her valuation will be binding

• PIP includes terms in arrangement on secured creditor treatment


How it will work in practice

Process map - PIA

Phase 1

Creditor will receive 14 days

notice of creditors

meeting (pack will include proposal,

prescribed financial

statement)

Creditor will forward proof of debt and either

Creditor (or agent) will liaise

with PIP on proposals as to what terms are acceptable prior


Creditor or representative

will vote to accept or reject the proposal (either in

attendance or by proxy)

The debtor will meet with PIP.

PIP will formulate

proposal based on

representations made and information

provided



Process map - PIA

Phase 2- if rejected

If proposal is not approved by 65% of total creditors

present as well as 50% of both secured & unsecured creditors

the process with the PIP will finish

creditor may continue to

pursue debtor as was the case

prior to the process

beginning



Process map - PIA

Phase 2 - if approved

If proposal is approved by 65% of total creditors present as well as 50% of both

secured & unsecured creditors

Creditor will receive a proposal

document (contract) from

PIP;

Creditor will instruct PIP of account details

& payment preferences



annual statement from

PIP on the performance

of the account;Debtor will be

discharged after 6 years if

compliant

If there is a material change in the debtors

financial circumstances

he/she is obligated to

inform the PIP of same and a

variation proposal will be

submitted



Process map - PIA

Phase 3

If there is a variation

Creditor will receive14 days notification of a

variation meeting and a

variation proposal

document from the PIP

Creditor will vote to approve or

reject variation- If 65% and 50%:50%

(unsecured: secured

creditors) of creditors

(present) vote to accept proposals All creditors will

be bound. Debtor will be

discharged after 6 years



Process map - PIA

Phase 4

If variation rejected

The process with the PIP will finish

Administration to finalise

same


Bankruptcy


Bankruptcy – key changes from existing legislation

• the Bill aims to discourage the use of bankruptcy• automatic discharge from bankruptcy reduced from 12 years to

3 years • can be extended to 8 years if non co-operation or if the debtor

has hidden or not disclosed assets• court can adjourn bankruptcy proceedings if of the view better

dealt through DSA or PIA• debts must be >€20k (previously €1,900)• award of costs - now discretionary (previously automatic)• 3 year look back (1 Year unconnected)• court to take account of "reasonable" living standards of debtor


Bankruptcy Comparison UK IRL Bankruptcy Timeframe 1 Year 3 Years (up to 15 Years) (up to 8 Years) Court County court (Chambers) Circuit Court (High court > €2.5)COMI No min (generally 6 months accepted) 12 Months Restrictions on occupation May not hold certain public office

Not act as director, Mgt of Co, elected representative

Necessary Assets allowed Tools of trade €6k

Lookback period5 years (in theory unlimited if concerns over legitimacy) 3 years

PensionsIncome will be included, Pension asset dependant on structure Not explicitly excluded

Bankruptcy – key Comparison with UK


Bankruptcy – key cases

• Yates- declared bankrupt in Wales on 24 August (4 months)• Quinn – COMI application rejected in Belfast• McFeely – UK bankruptcy overturned, now bankrupt in ROI• Eichler- COMI awarded to UK• Eichler II – COMI overturned to include Germany

• The cases where a COMI claim has been lost are usually when a creditor has followed the applicant

• Royal Tunbridge Wells (Kent)- destination for German bankruptcy tourists


Eichler II (30 June 2011) - UK

Chief Bankruptcy Registrar stated

• A debtor may now be required to file more detailed evidence to establish that his COMI is really in the UK and/or

• the court may adjourn the petition and require that notice of the hearing be given to the debtor's creditors so that they can appear and make representations at that stage in opposition to the making of the order instead of having to apply after the order is made


Case studies


Case study 1 - DRN

• Sean is married with 2 kids and recently lost his job• the family live in rented accommodation and his only

income is through the social welfare system• over the years while working he built up debts with 3

credit card providers totalling €14,000. He also has store cards of €3,000 and has fallen into arrears with the electricity and gas providers of €1,500

• Sean has no assets apart from household furniture.• after paying for his weekly essentials such as food,

clothes, rent etc. Sean has €53 a month left.


Case study 1 - DRN potential solution

• subject to Sean signing a declaration that the facts outlined are correct, Sean can apply for a DRN from a recognised intermediary (possible MABS) and this body will send all the required documents to the Insolvency Services for approval.

• the Insolvency Service will then issue a DRN to Sean, and a 3 year moratorium period will apply during which none of Sean’s creditors can pursue him for repayment of his debts.

• at the end of 3 years if Sean adheres to the debt relief process and contributes accordingly the debt will be written off, and Sean will be debt free.


Case study 2- DSA

• Niamh is a 37 year old contract agency nurse who works in Beaumont hospital, a single parent with 2 children

• she lives in Drogheda, near her parents, in rented accommodation• she has a 2008 Ford Focus which is necessary for her to get to work• she has no other assets and, after essential living expenses are paid,

has €400 a month left from her salary• she has 3 credit cards which total €18,000, she has a credit union loan

of €9,000, and a personal loan of €5,000• the combined monthly interest bill on her debts amount to €405. The

stress of her position has affected her health and Niamh is now regularly missing work and as a result her income is reduced when she doesn’t work.


Case study 2 – DSA potential solution

• a PIP will review Niamh’s circumstances and based on all of her circumstances identify an amount, say €300 a month, that will be ring fenced to meet her liabilities.

• a proposal will be sent to her creditors and at a creditors meeting if 65% of the creditors approve the proposal, then the DSA will be binding on all creditors.

• this amount will be collected monthly by the PIP and distributed to the creditors.


Case study 2 - DSA potential solution

• as Niamh is no longer concerned with her debts, her health improves, and should her monthly income improve say by an additional €100 net a month the PIP might agree to take 50% of this increase for the benefit of the creditors.

• the DSA will last for 5 years and subject to Niamh complying with the agreement, the payments made by Niamh will be deemed to be in full and final settlement of all her debts and she will be debt free at the end of the DSA.


Case study 3 – PIA

• Brendan is 43 year old accountant, married with 3 children, working in the financial services industry on a gross salary of €82,000.

• Brendan bought his house 10 years ago and while it’s now worth €300,000 he has a mortgage of €340,000 as he used the equity in the boom years as deposits to buy 2 apartments in Navan.

• the apartments, which were bought for €330,000 each, are now each worth €150,000 but have outstanding mortgages of €260,000.

• one of the apartments is vacant and the other has rental income of €700 a month. The loan repayments are €1,500 each a month.

• he has unsecured debt (credit cards, credit unions, personal loans) of €38,000.


Case study 3- PIA

• after tax he has €5,000 a month to live on but his current outgoings (incl. mortgage repayments etc. are €7,000)

• Brendan believes that if he sells the apartments he will never be able to repay the outstanding loans and is living in hope for a recovery in the property market

• he is ignoring the letters and calls from the various mortgage providers in the hope that they will just go away

• Brendan has kept his true financial position from his wife, which has resulted in significant stress being put on their relationship.


Case study 3 –PIA potential solution

A PIP formulates a proposal such as: • sell the vacant apartment for €150k and the shortfall of

€110K will be dealt with as part of his scheme. • the mortgage on the apartment that is rented will be

reduced to €160k as this can be discharged on an interest and capital basis from the €700 a month rental. The mortgage write-down of €100k will be added to his liabilities.

• his mortgage is extended by 5 years reducing the monthly repayments by €300 a month.


Case study 3 –PIA potential solution

• his debts, which are subject to the PIA, amount to €248K• the PIP calculates that Brendan can contribute €2,000 a month to

his creditors for 6 years• this equates to €144k and results in the creditors recovering just

over 50% of their debt• the scheme could also provide for circumstances where should

Brendan’s income go up, or should the property market recover (20 years from commencement date) that the creditors share in this increase

• at the end of the 6 year period, Brendan exits his PIA debt free, except for his mortgage and investment property which are now performing loans.


Case study 4 - PIA

• Alan Byrne is married with 2 children and he works as a sole practitioner Solicitor earning €200k p.a.

• During the Celtic Tiger Alan acquired two Commercial properties in Dublin , a retail unit on Grafton street with debt of €3m (financed by Ulster Bank) and a retail unit on Talbot street with debt of €7m (financed by AIB). There are no unsecured creditors.

• The secured debt is over €3m and the PIP has obtained approval from both banks to proceed with proposal

• Due to trading difficulties the same tenant who was in both units has gone into liquidation and the units are currently vacant.

• Both AIB and Ulster Bank have received a 14 day notice letter of a creditors meeting and a proposal from the PIP


Case study 4 - PIA

• during negotiations with the PIP, AIB have expressed a willingness to sell the property with immediate effect as they see no real medium prospect of recovery.

• Ulster Bank however believe the property in Grafton Street has a reasonable prospect of recovering some of its equity over the short to medium term given its prominent location

• the PIP proposes that the AIB property be sold at auction under the PIA and that the UB loan is restructured to meet rental income repayment with no recourse to Alan

• The properties are valued €2m (40% of Vote) and €3m (60% of Vote) respectively.

• both banks accept the proposals and the PIA will be passed as the 65% rule applies


Case study 5 - PIA

• Lets assume that the properties have aggregate debts of €1m (UB) and €2m (AIB) (below €3m- so no unanimous agreement required)

• The properties are valued at €667k (UB) and €1,333k (AIB)• AIB with 66.7% of the vote to accept while UB with 33.3% vote to reject• the PIA will be passed as the 65% rule applies • UB have 21 days to object to same under section 109 & 116 of the Bill


Case study 6 - PIA

• Lets assume Alan Byrne also has an unsecured personal loan of €50k from BOI with no other unsecured creditor

What difference would it make?• BOI would have the power to reject the PIA due to the fact

that they hold over 50% of the unsecured vote


Case study 7 - DSA

• If Alan Byrne acquired both properties via an SPV (to which Alan is a director)

• Alan has also given personal guarantees• Alan Byrne opts for a voluntary liquidation and the banks appoint

receivers to the respective premises • the properties are sold for their market value's in October 2012, leaving

Ulster bank owed €1m with AIB owed €4m, based on the shortfall• Assuming Alan Byrne has no other secured creditors, the PIP will

propose that the shortfall will be included along with the

€50k unsecured (BOI) debt in the arrangement

Questions and answers

Contact details Michael BolgerHead of Personal [email protected]

Barry O NeillPartner (Eugene F. Collins)[email protected]

Documents

© Grant Thornton Ireland. All rights reserved. Personal Insolvency Bill 2012 Michael Bolger – Head of Personal Insolvency With legal opinion from: Barry