Bill Holohan on Irish bankruptcy law reform

Bankruptcy Law changes in the offing.

Solicitor Bill Holohan, co-author of Bankruptcy Law & Practice in Ireland,
(2nd edition due for publication November 2010), looks at pending changes.

The Law Reform Commission (LRC) published a 443 page Paper on personal debt management and debt enforcement in Ireland in September 2009 and an Interim Report in May 2010.  In the 2009 Paper, the LRC reviewed, in a comprehensive way, the law of personal insolvency in Ireland, exposing how the current law evolved to deal with bankruptcy and insolvency of traders, but concluded that it is both inappropriate to and unsuitable for dealing with the more recent emergence of large scale non trader / consumer insolvency. The LRC urged a major re-vamp of bankruptcy law and practice in Ireland involving the creation of a new system of personal insolvency law in Ireland and in particular, a statutory, non Court based settlement scheme being introduced which would supplement, (though not completely replace), the (High Court) Court based scheme which operates under the Bankruptcy Acts 1988 & 2001.  The key principles of the new system which were proposed would be an “earned debt discharge” through an instalment payment scheme, open access for honest and long term insolvent debtors, legally binding debt settlements, a reasonable standard of living for debtors and their families and a discharge period of reasonable length, (shorter than the 12 years period under the Bankruptcy Act 1988 (the Act)).

The European Commission (EC) has also been examining this issue and in October 2007 it produced a Paper entitled “Overcoming The Stigma of Business Failure – The Second Chance Policy”.  This involved a review of insolvency law within the EU and on a scoring system devised by the Commission the UK came out tops in terms of the number of measures already adopted, and Austria came out on top for proposed measures, marks being awarded for reduced restrictions and better legal treatment for bankrupts, shorter discharge periods and streamlined procedures, (these being the terminologies used in the EC paper), the UK getting a total of 5 marks, and Austria 7. Meanwhile Ireland got only 2 marks, but this was based on an incorrect assumption that there was a system of automatic discharge from bankruptcy after 12 years in Ireland, which there is not. The LRC describes the Irish law as “out dated and ineffective”, saying that it is “exposed as unsuitable to providing solutions for the realities of a moderate credit society”

Undeniably bankruptcy is still viewed as an ignominious form of shameful legal limbo.  As recently as a few years ago a High Court Judge said that “Bankruptcy carries with it enormous penal and prejudicial implications for the person affected, be he a public representative, businessman, director of a company, member of an association or even as a person who has to seek employment or endure social or other opprobrium as a consequence of becoming bankrupt and being involved in its procedures thereafter”.  Certainly as a practising lawyer I have always advised anyone who has come to me indicating that they are considering bankruptcy, to avoid the “lobster pot” of bankruptcy at all costs and to seek to achieve some form of alternative settlement with their creditors, rather than allowing themselves to be made a bankrupt. 

An EU study on consumer Over-indebtedness and Consumer Law in the European Union has also described the Irish system as “totally inappropriate and hardly ever used by Debtors or Creditors in respect of consumer debt”.  What has been described as the “overly long twelve year discharge period and the prohibitive cost of the procedure” has also come in for attack and criticism.  The Study pointed out the relatively small number of bankruptcy petitions which are presented, (there being circa 22 petitions to end May 2010 (and 42 in all of 2009) with only 11 debtors being adjudicated bankrupt to the end of May 2010 (and 17 in all of 2009)).  The requirement to have recourse to the High Court does make it an expensive procedure for creditors and before any creditor considers bringing such an application, they have to consider whether there are going to be enough assets available to pay (a) the costs of High Court petition proceedings, (b) pay the costs, fees and expenses of the Official Assignee in Bankruptcy, (including stamp duty on any realisations), (c) pay the preferential creditors in the bankruptcy, and (d) then have something left over to share among the creditors generally, including the particular creditor bringing the application.  The lack of an effective system of inquiring into a debtor’s assets, before bankruptcy, makes this a crystal ball exercise at the best of times.

Once in the “lobster pot” of bankruptcy, it can be difficult to get out.  Anyone who is made a bankrupt remains a bankrupt, even after they die, unless discharged by Order of the High Court.  There is no automatic right to discharge.  A bankrupt cannot be discharged until they there are enough funds to pay items (a) to (d) mentioned above. (A 2005 challenge to the constitutionality of this legislation by Pat Grace was, on the particular facts of the case, dismissed as being moot, though the pleadings in the case did not refer to the European Convention on Human Rights as incorporated in Irish law and undoubtedly the matter remains open to challenge). There is a provision for discharge if all the creditors agree but this is unlikely in practice. There is also a provision for discharge where at least 60% of the creditors in number and value agree to accept a payment to allow the bankrupt to be discharged. If however the Bankrupt does not have the wherewithal to pay items (a) to (d) mentioned then they are effectively confined to bankruptcy for life. I was once consulted by a bankrupt where he was bankrupted along with his business partner, he being equally liable for partnership debts. The costs fees and expenses of the Official Assignee, plus the petitioner’s costs and preferential creditors, came to over €36,000 which would have had to have been paid, before the Bankrupt, who had been bankrupt for almost 30 years, could have applied to be discharged.  He did not have this money and had no hope of getting it.  As a result he was damned by law to remain a bankrupt.  His major concern was that if his spouse / partner died and he inherited property, the Official Assignee could claim it as “after acquired property” to pay off his 30 year old creditors and he would be put out of the only home he had known for almost 30 years.

The EU has taken the view that business closure and bankruptcy, and re-entry to the business world by bankrupts, are something which is natural and are not a synonym for fraud, even if a very small number of bankruptcies would appear to involve an element of fraud. However, the general public perception of bankruptcy in Ireland is of it as a quasi criminal affair rather than a rehabilitation process to allow entrepreneurs to re-enter the business world, having learned the lessons of failure first time round. 

The LRC has taken the view that Irish bankruptcy law does not comply with the criteria established in a Recommendation to the Committee of Ministers to Member States on Legal Solutions to Debt Problems published in 2007 and consequently the LRC has recommended that the 1988 Act be comprehensively reviewed and amended to harmonise Irish bankruptcy law with modern international practice and insolvency standards stating that after twenty years of the 1988 Act regime, the opportunity now exists to bring Irish bankruptcy law more in line with our European partners, while striking a fair balance between the interest of creditors and debtors, and to allow bankrupts to rehabilitate themselves and re-enter the market as entrepreneurs.  In its May 2010 Interim Report it recommended, as a first step, the reduction of the conditional discharge period from 12 years to 6 years.

The Civil Law Miscellaneous Provisions Bill 2010 published on 30th of August provides for limited proposals for amendments to the Bankruptcy Acts. Section 21 proposes to allow a reduction in the conditional discharge period from 12 years to 6 years and to provide for automatic discharge of bankruptcies existing for 20 years or more, with any property of the bankrupt which remains vested in the Official Assignee in Bankruptcy being returned to the bankrupt and revested in him or her subject to provision having first being made for the payment of expenses, fees and costs of the bankruptcy and any preferential payments. Section 21 (6) amends the existing section 85(4) of the 1988 Act by reducing the conditional discharge period for a bankrupt whose estate has, in the opinion of the Court, been fully realised, from 12 years to 6 years. The same conditions that currently attach in respect of the 12 year period, would continue to attach to the new 6 year period. In this context, should bankrupts be able to pay the expenses of the Official Assignee, costs of the Petitioning Creditor and preferential payments (if any) owed, they could be discharged from bankruptcy and freed from all other bankruptcy debts and from all the restrictions that apply to bankrupts.  This reduction from 12 years to 6 years for a conditional discharge is still well beyond the period recommended by the Law Reform Commission and the EU Commission’s Second Chance Policy. In the United Kingdom, for example, following the changes made in the Enterprise Act 2002, a non-fraudulent bankrupt can be discharged after as little as one year, while those who do not cooperate or who acted fraudulently can be subject to restrictions for 15 years. The objective is to allow debtors to rehabilitate themselves as quickly as possible.

Section 21(3) of the Bill is a restatement of the existing law in existing section 85(3) of the 1988 Act which provides that a bankrupt will be entitled to a discharge when provision has been made for the payment of the expenses, fees and costs in the bankruptcy as well as the preferential debts and he or she has paid one euro in the euro with such interest as the Court may allow or has obtained the consent of all the creditors. In the case of a composition after bankruptcy, that being a percentage offer is put to creditors and accepted by the requisite majority of them, he or she will be entitled to a discharge when, pursuant to section 41 of the 1988 Act, he or she has lodged with the Official Assignee cash or securities sufficient to meet the composition.

Section 21(4) of the Bill clarifies the existing law in section 85(3) of the 1988 Act in regard to obtaining the consent of creditors.   Section 21(5) of the Bill restates the existing section 85(4) of the 1988 Act which provides that a bankrupt will be entitled to a discharge when provision has been made for the payment of the expenses, fees and costs in the bankruptcy as well as the preferential payments and he or she has paid 50 cent in the euro to creditors and where the Court is satisfied that the estate of the bankrupt has been fully realised.  Section 21(7) of the Bill clarifies the existing law in the 1988 Act and provides that the Court shall not discharge a bankruptcy under subsections (5) or (6) where it is satisfied that proceeds of property realised by the Official Assignee at the date of the making of the application for discharge would be sufficient to pay a dividend to the creditors, until such dividend is paid.

While the introduction of an automatic unconditional discharge after 20 years is welcome, in principle, the period is still extremely long and certainly exceeds the periods recommended by the EU Commission. It preserves, for example, the possibility that a bankrupt, coming into property 19 years after his or her adjudication, where a judgement debt was 11 years old on his adjudication, might find that after-acquired property being claimed by the Official Assignee as after acquired property to satisfy his/her then 30 year old debt, whereas a non bankrupt debtor would find claims against him or her in respect of their judgement debts statute barred after a period of 12 years. This inequality of treatment may be open to constitutional challenge. As of the 31st of August 2010, some 327 bankrupts would be discharged under this 20 year rule.

Bill Holohan, B.C.L., LL.B., F.C.I.L.S., F.C.I.Arb, A.M. (CEDR) is the Senior Partner Holohan Solicitors, Cork & Dublin.