Personal Insolvency Law in Ireland is governed by the Bankruptcy Act 1988 (as amended) and the Personal Insolvency Acts 2012 to 2015 (the PI Act). The PI Act provides three methods of debt resolution, and introduces amendments to bankruptcy legislation.
All personal insolvency proceedings, including bankruptcy, are administered by the Insolvency Service of Ireland (ISI), which is an independent statutory body established in 2013 and operates under the aegis of the Department of Justice and Equality.
Personal insolvency proceedings, which are governed by the PI Act, comprise the following three arrangements:
A DSA and a PIA both share a three stage process:
Stage 1: A Protective Certificate (PC) is issued by the relevant court, which on issue precludes certain named or “specified” creditors from taking or bringing action against the debtor, including bankruptcy petitions, to recover their debt. When granted by the relevant court, a PC will apply for 70 days, but can be extended for a further 40 days on certain grounds.[i]
Stage 2: This involves the negotiation by a Personal Insolvency Practitioner (PIP) on behalf of debtor with their specified creditors and the approval of the proposal by way of a vote at a statutory creditors’ meeting. Recent legislation has provided for, in the case of a PIA only, the opportunity for the debtor to seek a court review of their proposal where the creditors have rejected the PIA proposal at the creditors’ meeting.[ii]
Stage 3: Implementation of Arrangements, including periodic distributions to creditors by the PIP and annual reviews by the PIP where appropriate.
A debtor may enter into a DRN, DSA or PIA only once.
Bankruptcy is an option for debtors who, due to their circumstances, do not meet the eligibility criteria for the abovementioned three debt solutions, or have previously entered into one of the debt solutions but the arrangement with the creditors proved to be unsustainable.
Where an individual has shown that their financial situation cannot be solved by an Insolvency Arrangement, and has a letter from a PIP to that effect, they may apply to the High Court to be made bankrupt. The individual must file an application for an Order of Adjudication (Bankruptcy Order) with the Examiner’s Office of the High Court and pay an initial fee of €200. Applicants will be heard before the High Court; after an individual is declared bankrupt, they are obliged by law to comply with the Official Assignee in Bankruptcy and his office (the Bankruptcy Division of the ISI), who are responsible for administrating the bankruptcy estate.
As soon as a debtor is made bankrupt their unsecured debts are written off in full, however, all of their assets become the property of the Official Assignee in Bankruptcy, who is the High Court appointed administrator of the bankruptcy estate.
Bankruptcy proceedings may be brought in the following two circumstances:
A bankrupt is automatically discharged from bankruptcy on the first anniversary of the date of adjudication, providing that they have not been subject to a Bankruptcy Extension Order (taken by the Official Assignee in cases of non-compliance).
The PI Act creates a new profession regulated by the ISI, which falls into two categories:
1. Approved Intermediaries (AIs): a person or corporate body authorised by the ISI to support debtors who wish to make an application for a DRN.
2. Personal Insolvency Practitioners (PIPs): a person authorised by the ISI to act as liaison between the debtor and their creditor(s) for the purposes of securing a DSA or PIA. A PIP is legally obliged to act in compliance with the PI Act and associated regulations.[iii]
In Ireland, individuals (including partnerships of individuals) initiate personal insolvency proceedings through the procedures set out in the PI Act. Creditors may initiate bankruptcy proceedings against a debtor, or a debtor may file for bankruptcy on their own initiative.
The primary condition for opening personal insolvency proceedings is that the debtor is insolvent, i.e. they are unable to meet their debts as they come due. The nature and extent of the debts and the debtor’s income then determines which of the three arrangement types is appropriate.
In order to ensure that an individual who is subject to an Insolvency Arrangement can still maintain a reasonable standard of living, the ISI formulated guidelines (following an extensive consultation process) called the Reasonable Living Expenses (RLEs). These guidelines, as well as ensuring the sustainability of the Insolvency Arrangement, also help to safeguard the debtor’s statutory right to a reasonable standard of living, ensuring a fair and transparent method for standardising day-to-day living costs for distressed debtors. A debtor’s RLEs, based on the template set out by the ISI, are calculated by their AI or PIP when they are applying for their Insolvency Arrangement.
1. Debt Relief Notice (DRN)
To apply for a DRN, the debtor must:
Typical examples of debts included in DRNs are credit card debts, overdrafts, personal loans, Credit Union loans, utility bills, and store cards.
2. Debt Settlement Arrangement (DSA)
A debtor is eligible to seek a DSA if he or she:
In addition to the debts listed for a DRN, the debts in a DSA may typically include loans and personal guarantees.
3. Personal Insolvency Arrangement (PIA)
A debtor is eligible to seek a PIA if he or she:
In addition to the debts listed for a DRN and DSA, the debts typically included in a PIA will include principal private residence housing loans, investment property loans, buy-to-let mortgages/loans.
In Ireland, individuals have the right to apply for a Self-Adjudicating bankruptcy, i.e. they may bring an application to the High Court to have themselves declared bankrupt. The conditions for bringing such an application are:
A creditor may also petition for bankruptcy proceedings. If the creditor is petitioning for bankruptcy, he/she/it must not have unreasonably refused to accept a proposal for a DSA or for a PIA.
An application for a bankruptcy order is by way of Petition, which obligates the applicant to submit various High Court prescribed documents and affidavits to the Examiners Office of the High Court. Once granted, the bankruptcy order takes effect from the actual time of the order itself; there is no retrospective effect back to the date of issuance of the petition for bankruptcy, as there may be in some jurisdictions.
Until the bankruptcy adjudication order is made there is no specific remedy for a creditor under the Bankruptcy Act to appoint an interim administrator – Section 23 of the Bankruptcy Act allows a bankrupt to be arrested post adjudication if he/she is about to leave the jurisdiction with the intention of avoiding bankruptcy.
A debtor or creditor can object to a bankruptcy order by filing a High Court motion and affidavits setting out their grounds of objection.
The general aim underpinning the PI Act is to protect, as far as is practicable, the debtor’s Principle Private Residence and the relevant provisions of the legislation are structured with that in mind.
Assets under Insolvency Proceedings
In the case of a DSA or a PIA, the PIP does not usually take physical possession or ownership of the debtor’s assets – rather the PIP takes control of a debtor’s income stream over the term of the arrangement and satisfies creditor claims from this income stream based on the terms of the arrangement. The income stream available is after deduction of RLEs, rent or mortgage repayments and other payments for special circumstances, such as medical expenses. Secured loan payments are usually paid direct by the debtor to their creditor as per the terms of their arrangement. If an asset is to be sold within an Arrangement, it is usually sold by the Debtor directly.
Assets under Bankruptcy
Under Bankruptcy Legislation, all assets belonging to the bankrupt on the date of adjudication immediately vest in the Official Assignee (this means that the Official Assignee now owns all assets in the bankruptcy estate). For sake of clarity, these assets include:
There are exceptions to the above:
A bankrupt is under obligation to inform the Official Assignee if they are in receipt of any assets during their bankruptcy term, regardless of how they came into possession of these assets. Such assets vest in the Official Assignee, when claimed by him, and enter into the bankruptcy estate.
A PIP, when engaged by a debtor, will act as a negotiator between the debtor and their creditors. PIPs are bound by legislation to act in the best interests of both the debtor and the creditor(s), therefore they are obliged to formulate the best possible arrangement for all parties concerned in an insolvency arrangement.
The role and functions of a PIP include:
In insolvency proceedings, the debtor’s role is to participate honestly in the process, agree to the arrangement negotiated by their PIP and meet the required terms of the arrangement.
On adjudication in bankruptcy, all assets divest from the bankrupt and vest in the Official Assignee (OA) in Bankruptcy. The OA is an independent statutory officer whose role is to administer bankruptcy estates and manage the Bankruptcy Division of the ISI.
In Ireland, a private individual can be appointed as trustee in bankruptcy to replace the High Court Official Assignee in Bankruptcy (OA). In practice, such appointments are extremely rare. The Bankruptcy Act does not specify any qualifications for such appointments.
The debtor’s powers in bankruptcy are limited to being able to apply to the High Court to challenge certain decisions of the OA. The debtor has an obligation to comply with requests made by the OAs office with regard to the administration of the bankruptcy estate.
The PI Act and the Bankruptcy Act 1988 (as amended) both allow for set-offs to be applied. It is set out that, when determining the value of an asset or an amount owed, any debt or credit balances (b) held with the same creditor may be set-off against the original amount (a). The remaining balance is thus considered to be the debt or asset, which can be owed to the arranging debtor or to their creditor(s).[iv]
If a debtor has savings in a Credit Union to which they also owe a debt, the Credit Union shall off-set these savings against the amount owed by the debtor.[v]
A Protective certificate prevents a creditor from taking any action during the Protective Certificate period. The ultimate Arrangement will set out what has been agreed with regard to pre-existing contracts.
Bankruptcy does not affect a secured creditor’s rights over their security, i.e. a secured creditor retains all of the rights that they held under the terms of their security prior to the bankruptcy – the only difference being that the OA is now the owner of the property, not the bankrupt.
The OA has a duty to realise (sell or dispose of) all assets in a bankruptcy estate in order to satisfy, the greatest extent, the liabilities of the estate. Therefore, all contract-based liability claims against the debtor become liabilities of the estate. The OA will, only in exceptional circumstances, continue with any service-based contracts to which the bankrupt is party.
If the OA continues a contract, he becomes personally liable with right of indemnity out of the estate funds.[vi]
DSA or PIA: The initial step taken by a debtor seeking a DSA/PIA is to apply for a PC from the relevant court. This, if obtained, precludes certain named or specified creditors, who are the subject of the PC, from taking any actions against the debtor for recovery or enforcement of the specified debts. In effect, the creditor is precluded from:
Once the debtor enters an arrangement, similar enforcement restrictions as set out immediately above will apply to creditors for the duration of the arrangement.
DRN: In the case of a DRN, once it has been granted by the relevant court, the same protections as listed above for a DSA/PIA apply for the duration of the DRN.
Secured and unsecured creditors are treated differently under bankruptcy. The only option open to a bankrupt’s unsecured creditors for recovery of their debts is to make a claim in the bankruptcy for the amount they are owed. Unsecured creditors cannot bring legal proceedings against the bankrupt after the date of adjudication. This is a direct and automatic consequence of the bankruptcy order made by the High Court. The rights of secured creditors are not affected by bankruptcy proceedings.
DSA, PIA, DRN:
See response to question 7.
As is the case with assets in a bankruptcy estate, the OA replaces the bankrupt as defendant in any existing lawsuits brought about by creditors against the bankrupt. The OA has the option to either defend, settle or abandon the proceedings. If the OA successfully defends the proceedings, any counterclaim or costs will be paid into the bankruptcy estate for the benefit of all creditors. If the proceedings are successful, or a settlement is reached, the agreed amount becomes an admitted claim in the bankruptcy.
The ISI has, by bringing stakeholders together, produced a standard protocol (precedent) document for the DSA and the PIA. This sets out the obligations of both debtors and creditors during the operation of the arrangement. Sample DSA and PIA protocol documents are annexed to this document.
A creditor participates as follows:
1. Proof of Debt: In DSA or PIA cases, after a PC has been issued by the court to a debtor, their PIP must write to the creditors involved to inform them of their appointment, and to invite them to submit proof of their debts and an indication of how their debt should be treated under the terms of the arrangement.
In Bankruptcy, all creditors are required to submit formal proof of debt before a dividend is paid to them.
2. Vote: When a creditor’s meeting is called by a PIP acting for a debtor who wishes to enter into a DSA or a PIA, the creditors involved are entitled to vote on the terms of the agreement, provided that they have proven their debt.
3. Objections: A creditor may object before the courts before the terms of a DSA or PIA come into effect. The specific terms are set out in legislation.[vii]
4. Offer of Composition: Creditors are entitled to vote on an Offer of Composition brought about by a bankrupt. This would occur when a bankrupt wishes to reach settlement with some or all of their creditors before the term of their bankruptcy has elapsed in order to retain all of their assets.
In respect of a DSA or PIA claims are not formally lodged by a creditor against a debtor. The first stage in the process is the completion of a debtor’s Prescribed Financial Statement (PFS). The PFS lists all creditors and the amounts due to each creditor, and is the factual basis on which a PC is issued. Following the issue of the PC creditors may be asked by the PIP for proof of their debt in advance of an insolvency arrangement being prepared by the PIP. Where a creditor does not provide proof of debt after being requested to do so, there are implications in terms of voting rights for the arrangement and dividend share.
In respect of a DRN application, formal creditor claims are not made, but a creditor may be requested by an AI for confirmation that the sum disclosed by the debtor as due is the correct figure.
Fresh debts arising after the Arrangement date are not covered by the Arrangement. In the event that pre-existing debts change in magnitude, a variation to the overall arrangement may be required (e.g. contingent liability crystallises)
In bankruptcy, the profile of a bankruptcy estate (all of the bankrupt’s assets and liabilities) is set out on two forms that the bankrupt is required to fill out and submit to the Bankruptcy Inspector on the day of their adjudication: the Statement of Affairs and the Statement of Personal Information. All types of liabilities are included as unproven claims in the bankruptcy provided that they were incurred by the debtor prior to their date of adjudication, i.e. the date that their bankruptcy term begins. Any debts that are incurred by the bankrupt after the date of adjudication cannot be included as a claim in the bankruptcy.[viii]
Following the issue of a PC in DSA and PIA insolvency proceedings, the specified creditors are given notice of the issue of the PC and a copy of the debtor’s PFS. The creditor may be asked to provide proof of debt and is asked what their preference is as to how they would like their debt treated. A creditor’s debt shall be proved in the same manner as a debt of a bankrupt is proved under the Bankruptcy Act.
After the creditor has proven their debt, they will be entitled to vote at the statutory creditors’ meeting convened to approve the debtor’s proposal. If the creditor does not submit a proof of debt, or otherwise inadequately proves their debt, they cannot take part in the creditors’ meeting or participate in any dividend payment provided for in the arrangement.
Notification of individuals who have been adjudicated bankrupt are sent to a list of financial institutions and Government Departments by the Bankruptcy Division of the ISI the day after the individuals are adjudicated bankrupt. Notice of these adjudications are also posted on the ISI website and in Iris Oifigiul, which is an official Irish State publication.
All secured creditors in a bankruptcy estate are given thirty days’ notice (in writing or by email) from the date of adjudication to lodge proof of their claims in the bankruptcy estate. Such proof of debt can take the form of mortgage deeds, invoices, statements and bills, or in some circumstances an affidavit from the creditor may be required.
Before a dividend is paid to creditors in a bankruptcy estate, the ISI will advertise the upcoming payments and the cases they relate to. The creditors (both secured and unsecured) are again given thirty days to lodge their claims with the ISI, and the same burden of proof is required.
In all cases, creditors are required by the Bankruptcy Division of the ISI to fill out standardised Proof of Debt Forms, which are available on the ISI website.
In Personal Insolvency Arrangements (PIA) and Debt Settlement Arrangements (DSA), preferential debts are paid per the terms of the agreement, and in bankruptcy preferential debts rank directly after bankruptcy fees and any costs or expenses incurred by the OA when dealing with the bankruptcy estate. Debts that are considered to be preferential are:
In a PIA, the secured creditor is bound by the terms of the agreement. In a normal PIA the secured lender is paid out of the debtor’s income at whatever figure is agreed to in the arrangement. The debtor’s remaining monthly income, if any, after the debtor’s RLEs and PIP’s fees are deducted is paid to their unsecured creditors by way of dividend.
Bankruptcy does not affect the rights of a secured creditor. Such a creditor may take one of the following three options with regard their secured debt:
In both a PIA and a DSA, the debts of unsecured creditors are settled under the agreed terms of the arrangement. In a DRN if a person’s circumstances improve during the supervision period, he/she must tell the ISI and depending on the level of change, may be asked to make some contribution to what he/she owes.
The claims of unsecured creditors of a bankruptcy estate are ranked equally. Their debts are settled with the disbursement of any funds that remain after bankruptcy fees, OA expenses and preferential debts have been settled.
The general condition for satisfactory closure of insolvency proceedings is that the debtor has complied with their obligations under the arrangement for the full term of the arrangement. Once this has happened, the debtor stands discharged from their unsecured debts. The status of secured debt will be dependent on the specific terms of the arrangement.
If the debtor breaches the terms of the DRN, DSA, or PIA, it may be terminated. If the debtor reaches 6 months of arrears in payments, the agreement is deemed to have failed. In either event, the debtor becomes liable for the full debts due by them, including all arrears, charges and interest accrued during the period of non-payment in respect of those debts.
A bankrupt who has complied with the bankruptcy process is automatically discharged from bankruptcy after one year. A bankrupt may, at any stage during their bankruptcy term, make an offer (composition) to their creditors in order to settle their debts. The bankrupt has to apply to the High Court for a stay on their bankruptcy proceedings; this stops the OA from further realising any assets in the estate. The bankrupt may then make the offer of composition in the High Court to his creditors. The offer of composition is voted on by the bankrupt’s creditors; if at least 60% of these creditors (by number and by value of debt) agree to the terms of the offer, it will be passed.
Payment of the amount agreed under the offer of composition may be sourced from dividends of the estate or by funds from the bankrupt themselves. Any fees or expenses incurred by the OA’s office in the administration of the bankruptcy need to be satisfied, as well as any preferential debts. Once the OA agrees to the High Court mediated offer of composition, the bankrupt is discharged from bankruptcy.
Unsecured creditors – not applicable.
Secured creditors – the status of secured debt will be dependent on the specific terms of the arrangement.
In bankruptcy, creditors cannot pursue the bankrupt for any existing debts after the date of adjudication (debts incurred by the bankrupt post-adjudication may be pursued normally); they must instead liaise directly with the OA. Once the bankrupt is discharged from their bankruptcy, which is after one year for the majority of cases (incidences of non-compliance etc. may extend this term for up to 15 years), all unsecured debts (including preferential debts) are discharged. The debts associated with secured creditors, where they exercise their option to rely on their security, will persist after the date of discharge. For secured creditors, the bankruptcy proceedings shall not affect their rights over the secured asset.
If the secured creditor has valued their security and claimed in the bankruptcy for the shortfall (as an unsecured debt), the portion remaining after payment of any dividends will be written off after discharge. It should be noted that, even if a secured creditor only exercises their option to rely on their security (and not claim for the shortfall in the bankruptcy), they will be unable to pursue the debtor for any shortfall after they are discharged from bankruptcy. In this scenario, the net effect of bankruptcy on a secured loan (or mortgage) is that any portion of the loan over and above the value of the linked asset (at the date of adjudication) is treated as an unsecured debt.
DSA or PIA: In insolvency proceedings, creditors generally bear the costs of the arrangement. PIP fees, as agreed with creditors at the time the arrangement is voted on and passed or on subsequent approval by court on a review, are deducted from available debtor funds. Where a creditor raises an objection to the issue of a PC or Arrangement, the creditor generally bears his or her own costs [x]. Where a creditor raises an objection to a proposed PIA, the creditor may apply to court for the award of costs if its objection is upheld [xi]. In the usual course of events costs follow the cause, i.e. the party whose actions incur the costs must pay them.
DRN: There are no costs involved in a DRN.
Creditors bear the costs of the bankruptcy, which are paid out of any funds available in the bankruptcy estate.
Included under the conditions that a debtor has to meet before they can enter into insolvency proceedings is a provision that they must provide a complete and accurate statement of their financial affairs, and sign a statutory declaration confirming this information. The Personal Insolvency Practitioner (PIP) must also satisfy themselves that the debtor is being truthful, and has fully disclosed to them all pertinent information in relation to their financial situation. A creditor or PIP, or the ISI in respect of a DRN only, may apply to court to have an insolvency proceeding terminated under certain grounds provided for in the PI Act, including:
The creditors do not have any right to seek reversal of any transactions or asset transfers prior to the commencement of the insolvency proceedings. However, if the debtor can be considered to have made excessive contributions to a pension fund, the creditor may seek financial relief from the courts. This may result in the court ordering that the fund provider issues a full refund of the amount for distribution among the creditors party to the arrangement.
Previous asset transfers and payments that bankrupts made to creditors or other individuals can be overturned under bankruptcy legislation. This includes situations where:
In all of the scenarios above, the OA must prove by affidavit before the High Court that these transactions did indeed occur in such a manner that satisfies the High Court under the terms of the legislation; thus, these transactions/transfers would be considered detrimental to the creditors of the bankruptcy estate.
[iii] Refer to Part 5 of the Personal Insolvency Act 2012 for the legislative basis for a Personal Insolvency Practitioner, and the Personal Insolvency Act 2012 (Authorisation and Supervision of Personal Insolvency Practitioners) Regulations 2013 (S.I. No. 209 of 2013) for qualification criteria, regulatory standards and authorisation requirements.
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