Questioning the Irish Bankruptcy Law

A challenge to Ireland’s arcane insolvency statutes may be made to the High Court within months, as indicated by an interesting story in The Sunday Independent by Maeve Sheehan. This is an fascinating occurrence if a test is made on the grounds of alleged breaches of the constitutional rights of men and women contending with personal bankruptcy. It will be really stunning if this is going to arise and grow into the switch for change of the legal system along with the introduction of completely new legislation on private personal debt coupled with debt enforcement regulations. It might be unfair to accuse the new Fine Gael - Labour coalition government of sitting on its hands on this problem, given the inertia and inaction of the old Fianna Fail - Greens government, which were not able to manage to get thier collective minds round the notion of individual debt forgiveness. The new government has had many significant sovereign and banking financial problems to contend with however it is now time to focus on business that can help the individual citizen.

At this time there is no shortage of opinions or lobbying by vested interests most notably banks and financial institutions. Undoubtedly any degree of individual debt forgiveness as distinct from forbearance will certainly have an unfavorable effect on the bottom line of lenders and other creditors. Bad debts will crystallize and bad debt provisions will need to be considerably increased. So many varied opinions have been expressed by so many experts and lobbyists ranging from finance ‘experts’ to solicitors to accountants to bankers. They wax lyrically on problems such as moral hazard, can’t-pay versus won’t-pay, and other such red herrings while the financial pain of the insolvent citizen goes largely unheeded.

The numerous and specific recommendations crafted by the Law Reform Commission (LRC) with respect to individual indebtedness distinctly recommended the importance of introducing individual debt forgiveness in any impending laws on personal insolvency. Yet senior civil servants have described the recommended reform of Irish insolvency law as unfair on the grounds that it is ‘very debtor friendly’! While knowing that many Irish people have debts that they will never truthfully be in a position to repay, the notion of private debt forgiveness is rejected on the argument that it is not just the banks and other big credit houses which will endure hardships, but also many regular small businesses and self employed people such as tradesmen, small builders, architects and other professionals who will be left without payment by defaulting borrowers who may be ‘forgiven’. This is laughable and anyone who is aware of how personal insolvency laws work in the UK for instance would soon understand that.

The LRC has already carried out all the heavy lifting. The groundwork has been finished. Experts have been conferred with at home and overseas. Many foreign jurisdictions have been checked out and benchmarked. The credit and insolvency industries have given their input. The LRC has circulated its final report Personal Debt Management and Debt Enforcement in December 2010. The EU/IMF/ECB has laid down March 2012 as the final target time for reform of Irish personal insolvency law together with reform of bankruptcy legislation. The LRC recommends that any new Irish insolvency legislation should stress the ‘fresh start’ idea on which much of the finest European and American personal insolvency legislation is based.

The LRC has already identified the most imperative and key reforms vital pertaining to the Bankruptcy Act 1988. In fact the proposed new act (currently titled Draft Personal Insolvency Bill 2010) and the old Bankruptcy Act 1988 (which requires urgent change and amendment) are so intricately intertwined that it makes no sense to pass new laws without at the same time (or as contemporaneously as is possible) amending the old act.

The alterations to the Bankruptcy Act 1988 proposed by the LRC are: to set a minimum level of Euro 50,000 to generate a creditor’s petition of bankruptcy; to eliminate the necessity that the insolvent debtor have readily available resources of at least Euro 1,920 to petition for his or her own bankruptcy; to empower the court to consider the debtor’s insolvency and to stop actions to facilitate the borrower to try a Debt Settlement Arrangement (DSA) - as detailed in the new draft act; to set up a Pre-Action Protocol which would apply to a creditor’s petition for bankruptcy and which would oblige the debtor and creditors to investigate other achievable solutions such as a DSA before embarking on the bankruptcy path and enable the court to stay bankruptcy proceedings; to empower the court to stay proceedings to look into other ways in the case of a debtor’s petition for bankruptcy, with similar requirements and powers as under the Pre-Action Protocol; to set types of conditions for the automatic release of the bankruptcy, allowing for release before all of the bankrupt’s property has been realized; to cut down the automatic discharge period to three years; to empower the court to order repayments by the bankrupt for up to five years; to determine the powers of the court pertaining to discharge and to objections to discharge by the Official Assignee/Personal Insolvency Trustee; to eradicate the obligation to pay charges, fees and so on ahead of discharge; to scale back the quantity of priority debts making specific debts (e.g. Revenue debts) no longer being priority debts; to establish sanctions against dishonest and/or reckless bankrupts, such as restrictions and disqualifications; to exempt assets so as to guarantee a fair living standard for the bankrupt; to establish conditions for the appointing and accreditation of a new office holder called Personal Insolvency Trustee acting in bankruptcy, with the new accreditation system overseen by a (new) Debt Settlement Office.

Does the absence of any or all of the above provisions in law constitute a infringement of the constitutional rights of a person confronting bankruptcy? Will government move before it is pushed to take action by a legal challenge? a legal challenge be long drawn out and have the consequence of unduly postponing the enactment of new legislation? There are sure to be legal changes coming down the tracks and the debate on many peoples’ lips is when that will be.