High Court Considers Veto of Secured Lenders in Personal Insolvency Applications
Baker J in the High Court has given three recent judgments in matters concerning Section 115A(9) of the Personal Insolvency Acts 2012 – 2015 (the Acts). This Section gives a Court power to review and approve a Personal Insolvency Application (PIA) rejected at a meeting of creditors.
Here Baker J heard an appeal from a Circuit Court order upholding the objection of the secured creditor, EBS Limited (EBS).
The debtor (JD) and her two young children resided at her principal private residence which she owned jointly with her former husband (MR). The couple had a joint mortgage of €300k which fell into arrears in 2013. MR had not contributed to the mortgage for a number of years and although he had agreed to make voluntary maintenance payments, these were only paid intermittently. The couple also had unsecured loans in the sole name of JD.
EBS, after engaging with JD and MR through the MARP process, commenced possession proceedings. Through MABS, a short-term arrangement was put in place but unfortunately JD unknowingly engaged the services of an unregulated insolvency advice service which cost her time and money in dealing with her debts. On discovering this fact JD resumed monthly payments of €700 to the mortgage which was less than the agreed amount, but relatively substantial in the context of her earnings. She also obtained a maintenance and attachment of earnings order from the District Court in respect of MR and presented a PIA to a meeting of creditors in January 2016. The PIA was rejected by EBS.
JD argued that the proposed PIA gave a better return for creditors than would be achieved in bankruptcy, enabled her to retain ownership and occupation of her principal private residence where she resided with her two small children, and that the mortgage repayment arrangements proposed were sustainable such as to enable her to return to solvency.
The PIA proposed the write off of uncapitalised arrears and a further sum with the balance split into two parts, a live balance and a warehoused sum together with an extension of the term of the loan. It was proposed that payments on the warehoused element would commence at the end of the PIA.
EBS did not object to the splitting of the mortgage, or the moratorium on payment of the warehoused amount, and the writing off of some of the secured debt. However, it argued that it was unfairly prejudiced primarily because MR's agreement to the proposal was not forthcoming. It also argued that it was not satisfied that JD could meet the proposed terms of the PIA if MR did not continue to meet his maintenance obligations. EBS also alleged that JD showed a degree of financial imprudence, pointing out that a more generous offer was rejected by the couple during the MARP process, and they had since accumulated further arrears of more than €40k.
The Court noted that the power of the Court under Section 115A is not absolute and its jurisdiction may be exercised only if it is satisfied that the proposals are not unfairly prejudicial to the relevant interested parties. The Court accepted that there would be unfair prejudice if the proposed PIA had the effect of rendering EBS's claim against MR void. However, the Court held that EBS was protected by the express terms of the PIA itself which stated that the agreement with the JD did not discharge the obligations of any co-debtor. This together with the statutory protection of Section 17 of the Civil Liability Act 1961 protected EBS with regard to its claim against MR.
The Court noted that the arrangement was more advantageous than the likely outcome in bankruptcy which did not suggest any unfair prejudice to any class of creditors. It also noted that the common good sought to be achieved in Section 115A was the protection of the right to continue to enjoy residence in a person's home and this focus must be kept in mind by the Court when considering the benefit of the PIA, and the existence of unfair prejudice.
The Court rejected EBS's contention of financially reckless behaviour by JD noting that she had rationally approached her finances in the circumstances as she understood them at that time and her conduct did not amount to a ground of objection.
With regard to EBS's objection that there was insufficient evidence of JD's ability to meet the proposed PIA if MR ceased to pay maintenance, the Court noted that JD had obtained a court order for maintenance and had taken all necessary steps to secure the payment of maintenance on an ongoing basis. The Court could not 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 of a debtor, or of any person, including his or her employer or maintenance debtor.
Accordingly, the Court exercised its jurisdiction under Section 115A and approved the proposed PIA, dismissing the creditor's objection.
In this case the debtor's PIA was rejected by the sole creditor, EBS Limited (EBS). The debtor sought approval of the PIA from the Circuit Court under Section 115A(9) which was refused. The debtor appealed.
The proposed PIA included a writing down of a substantial part of the capital and an interest only repayment for 6 years, followed by repayment on a full interest and capital basis thereafter, at the prevailing variable interest rate. The return to the secured creditor from the proposed PIA would be better than the dividend on a bankruptcy and would permit the debtor to retain occupation of his principal private residence where his young daughter visited him at weekends. EBS argued that the proposed PIA was unfair and inequitable in circumstances where it had already obtained an order for possession. It also argued that there was no reasonable prospect that the debtor would be able to comply with the terms of the proposed PIA in circumstances where his payment history had been poor for eight years. EBS also pointed out that the PIA did not cater for significant refurbishment work which the property required. The property was leaking and had no kitchen units, appliances, oil boiler, oil tank or running water. Furthermore, an extension and garage had been constructed without planning permission. EBS pointed out that the mortgage conditions required the debtor to maintain the premises in good repair and to comply with all legal obligations in respect of the property which he had failed to do. EBS objected to any indulgence by the Court where the actions of the debtor had led to a devaluation of the premises.
The debtor claimed his default in payments was due to the lack of job opportunities due to the collapse in property development but he was now working as a subcontractor on a two year contract and was confident that his income would thrive with the improvement in the construction industry generally. He also stated that he had been injured in 2008 which led to a year's recuperation and social welfare payments were insufficient to meet the mortgage repayments in the intervening period. The debtor told the Court that he had been making monthly payments in excess of the agreed payments on his mortgage and that the proposal was sustainable and affordable. He explained the damage to the property arose when he moved out temporarily after the order for possession was served on him and the property was broken into and appliances stolen. He also claimed that the extension was within the planning exemption.
The Court noted that the medical exhibits suggested the debtor was unable to work for a period of six months not one year as claimed. EBS produced correspondence to the Court from an engineer who stated that the extension was not exempt from planning permission. The Court noted that Section 115A(9)(c) required it to have regard to the costs of enabling a debtor to continue to reside in his principal private residence, and to ensure that these are not disproportionately large. Here, the debtor owed a sum in excess of €380k in respect of a property with a value of €105k which was in a poor state of repair. The Court considered that the debtor had not adequately addressed the planning issues and no estimate of the cost of dealing with the planning difficulties has been provided by the debtor. Given the lack of convincing and concrete detail in the application, the Court was not satisfied that the debtor had adduced sufficient evidence to persuade it that the proposals were sustainable.
The Court also noted that a debtor is required to engage with the process in good faith. Here the debtor had stated on affidavit that he had been making monthly payments in excess of the payments proposed in the PIA , however, at the time that affidavit was sworn, the debtor had ceased making those payments and had commenced making payments into a bank account. The Court was satisfied that the debtor had not engaged bona fide with the process and his lack of candour was material and serious.
Accordingly, and in the exercise of its discretion, the Court refused the appeal and upheld the objection of EBS.
In this case the High Court considered an appeal from an order of the Circuit Court which granted Ulster Bank an extension of time to lodge a notice of objection to a proposed PIA.
The Court had to consider firstly, whether the time limit provided for the lodging of a notice of objection could be extended and secondly, whether the Circuit Court had jurisdiction to extend the time.
The Circuit Court Rules provides that an application under Section 115A must be brought no later than fourteen days after the meeting of creditors. The High Court in Re Hickey & Personal Insolvency Acts  IEHC 20 held that this time limit is mandatory and no provision exists for the extension of time.
Section 115A(3) provides for service of the proceedings on "all creditors concerned" and a creditor may, within 14 days of the date of the sending of the notice, lodge an objection to the application. The debtor argued that this time limit was a strict one and the Court did not have power to extend it.
The Court held that the fact that a property right in a debt is capable of being adversely affected by the application, and because the Acts do not expressly preclude the Court hearing a creditor who has not lodged a formal notice of objection, the time limit under Section 115A(3) could not be regarded as mandatory and therefore was capable of being extended.
The debtor also argued that the specialist judge of the Circuit Court had no inherent power to extend time. However, the Court noted that a specialist judge may exercise the powers and jurisdictions conferred by statute and may make any order that may be made by a County Registrar under The Court and Court Officers Act 1995. As an express power to extend time is included in that Act, the specialist judge had the power to make the order in question.
The debtor argued that the extension of time was incorrect as the application was not grounded on affidavit and the specialist judge had no factual basis on which she could come to the conclusion she did. However, the Court noted that Counsel for Ulster Bank had attended at the hearing to explain that the delay in lodging the notice of objection had occurred due to an administrative error.
In the circumstances the Court rejected the debtor's appeal.
As Section 115A is being used more frequently by debtors we are seeing more High Court appeals as the parameters of the Section are tested by the parties.
For further information please contact Paula Mullooly or your usual contact in A&L Goodbody.
Date Published: 20 June 2017