I am very pleased to be before the House to present this Bill which provides for important changes to the Personal Insolvency Act 2012 arising from the Government's initiative of 13 May to strengthen support for people in mortgage arrears. The main reform contained in the Bill is the new provision for independent review by the courts where a proposal for a personal insolvency arrangement, PIA, including arrears on the borrower's home mortgage, has been refused by creditors.
Senators will recall that the PIA is a debt solution provided under the Act for dealing with secured debt such as home mortgages, and that, while respecting the rights of creditors, the PIA provides significant statutory protections for the debtor. These include keeping the debtor in his or her home where reasonably possible, the right to a reasonable standard of living while insolvent, and protection against any unilateral change to the arrangement. These statutory protections, which were debated at length by the Oireachtas, are not necessarily available to borrowers who enter an informal arrangement with their lenders, or who enter bankruptcy. That is why effective and early access to a PIA, where feasible, is an option of central importance for people struggling with long-term mortgage arrears.
The new court review is a key reform, designed to ensure fair and sustainable debt restructuring proposals are upheld for borrowers who want to work their way out of debt with a view to keeping their homes. It will protect distressed mortgage holders from any unfair lack of cooperation by their banks, while respecting the legal rights of creditors. In particular, it will ensure a better balance between the interests of secured lenders and the interests of those facing unsustainable mortgages. It will also be accompanied by flanking support and information measures aimed at ensuring that those in serious mortgage debt can access practical help quickly and effectively.
The second important proposal in the Bill is to increase the level of debt which may be included in a debt relief notice, DRN, from the current limit of €20,000 per person to €35,000. Senators will recall that a DRN is a debt solution provided under the Act for an insolvent person who is on a very low income, who does not own a property or any significant assets, and is weighed down by debts which he or she has no prospect of being able to pay. Another amendment removes a possible bar which might prevent a home owner who has entered a mortgage restructure from accessing a PIA if the restructure proves unsustainable.
The third important element in this Bill provides more detailed powers for the Insolvency Service of Ireland, ISI, in respect of promoting awareness and understanding of matters related to personal insolvency and bankruptcy and providing information and analysis of their operation in practice. Other provisions develop the ISI's supervisory powers regarding personal insolvency practitioners, in line with best practice regulatory standards.
The Bill contains a number of technical amendments of a prudential or clarifying nature which I will come to later in my remarks.
By way of background to the new court review, I would like to return to the broader context of insolvency policy and its interaction with the wider question of mortgage arrears. Senators will recall that the Statement of Government Priorities 2014-2016 underlined that high levels of personal debt continue to threaten to exclude thousands of individuals and families from the economic recovery. In its report on mortgage arrears last July, the Oireachtas Joint Committee on Finance, Public Expenditure and Reform referred at recommendations 46 and 47 to concerns about the potential costs of personal insolvency solutions, noted "the public refusal of some financial institutions to engage in any write-down of secured debt", contrary to the Government's policy in enacting the insolvency legislation, and recommended that the insolvency legislation be reviewed to mitigate against such a practice.
I am pleased to say the Minister for Justice and Equality, Deputy Frances Fitzgerald, was able to respond on the issue of fees and costs by providing for a complete waiver of all fees payable to the insolvency service or the courts in respect of insolvency applications, with effect from last October.
On the issue of engagement by financial institutions, Senators will remember that the Taoiseach, the Tánaiste and the Minister, Deputy Frances Fitzgerald, met the insolvency service and insolvency practitioners in early February this year, and that the Taoiseach spoke publicly after that meeting about the need for banks to co-operate more effectively with the personal insolvency regime. In her Second Stage speech in the Dáil on the Bill last February the Minister welcomed the gradual increase in the number of applications for personal insolvency solutions under the Act. She added that she wanted to see a more fundamental change in the overall number of solutions reached under the Personal Insolvency Act.
The ISI statistics for quarter two of 2015 show 384 new personal insolvency arrangement, PIA, applications and 146 concluded PIAs during that quarter, with both rates continuing to increase steadily. However, these numbers remain very small compared with the numbers in serious mortgage arrears. The proportion of PIA proposals approved by creditors is also increasing, and stands at 73% for quarter 2 of 2015. Nevertheless, there remains persistent evidence that some secured creditors have an acknowledged policy of refusing to consider PIA proposals or wide categories of PIA proposals despite an apparent commercial rationale, and that consequently no proposal is ever made in many cases which would otherwise be considered as suitable. This is a serious concern and the need for the new court review arises against this overall background.
In the past year we have seen a very welcome decline in the number of home mortgages which are in arrears, particularly in those in short-term arrears. On the other hand, some 38,000 principal dwelling house, PDH, mortgage accounts remain in long-term arrears exceeding 720 days. This substantial group is a source of major concern, as they are likely to be at imminent risk of losing their homes to repossession. The latest Central Bank statistics suggest a slight recent reduction, but we will need to see a very significant fall in these numbers in the coming year.
There has also been a significant increase in the number of mortgages which were formerly in arrears, but which have been restructured by an agreement between the mortgage lender and the borrower. However, a cautionary note also has to be sounded regarding a proportion of these informal mortgage restructures which may not be sustainable and where the borrower has not been returned to solvency and risks falling back into arrears. There has also been extensive public debate and concern about recent increases in the number of repossession proceedings issued against borrowers' homes. While the number of actual repossessions remains low, it is a core Government priority that repossession of a borrower's home should remain an option of last resort.
Clearly not all insolvent debtors are suitable for a PIA. Each case must be assessed fairly on its own facts. There will be cases in which the borrower does not have the financial capacity - even with mortgage restructuring - to make the necessary level of repayments. Such cases cannot be resolved via personal insolvency legislation, and will need alternative solutions such as expansion of the mortgage to rent scheme.
In tandem with this reform to the Personal Insolvency Act, the Government is co-ordinating intensive work across all relevant Departments and agencies to deliver on the wider elements of the mortgage arrears initiative, including arrangements to deliver assistance and advice through the Money Advice and Budgeting Service, MABS, and the Insolvency Service of Ireland in the courts when repossession actions are taking place; enhanced and expanded arrangements for mortgage to rent; and a nationwide information and publicity campaign aimed at assisting those in serious mortgage arrears to engage with their lenders and with the courts where repossession proceedings have been initiated, coupled with an undertaking that, when they do engage, co-ordinated services will be there to assist them. The access and support measures are being implemented across the system at present, and will be in place for September.
I turn now to the specific measures contained in the Bill, first to the new court review contained in section 21. Currently, under the Act, a proposed PIA is voted on by the creditors and must be approved by the necessary majorities of secured and unsecured creditors. If the creditors reject the proposal, there is no provision for a review or appeal. The new court review will change this situation. It applies to a PIA proposal which has been rejected by creditors; and which includes a mortgage on the borrower's home which was in arrears on 1 January 2015 or is a restructure of arrears from before that date. The date of 1 January 2015 is to avoid any negative impact on new mortgage lending. The proposal focuses on home mortgage arrears due to the priority of this particular group, and because the public policy issues arising in this context provide a particularly strong justification for rebalancing the rights of secured creditors.
The personal insolvency practitioner, PIP, who prepared the proposal must confirm there are reasonable grounds for a review and that a majority of one class of creditors has voted for the proposal. This requirement for an element of creditor support reflects the approach used in company examinership, which was already signalled in the Government announcement on 13 May. However, it is not limited to the classes - secured debt, unsecured debt, overall debt - which voted at the creditors' meeting. It is a much lower and more flexible requirement. In the context of a court review, a "class of creditors" is widely defined and may consist of a single creditor, or of more than one creditor with similar interests. This flexible test will facilitate finding a solution which is fair and reasonable for all concerned, as it does in examinership, and the court will ensure that it is applied fairly.
The Bill also provides for a significant exception to the creditor support requirement. In many cases involving a mortgage, the borrower has consolidated his or her debts with a single creditor. In these "sole creditor" cases, if the sole creditor refuses the PIA proposal, the debtor will not have to show any creditor support before seeking a court review. This exception effectively opens up the whole PIA process to a large number of cases where until now, no PIA proposal has even been made as it was felt that the sole creditor would be unlikely to agree to a deal offering statutory protection for the borrower.
In reviewing the proposal, the court will consider whether it allows the borrower to stay in or keep their home if reasonably practicable, and if the costs are not disproportionately large; and whether it gives a reasonable prospect of restoring the borrower to solvency while repaying the creditors to the extent that the borrower's means reasonably allow. The court will also consider whether the proposal is reasonably likely to be one with which the borrower can comply, given the borrower's financial circumstances. If relevant, the court will consider whether the conduct of borrower and lender regarding repayment of the debt in the previous two years is fair and equitable to each class of creditors affected. It will also consider whether the proposal is unfairly prejudicial to any interested party and whether it has been accepted by a majority of one class of creditors which may consist of a single creditor or of more than one creditor with similar interests. This is the same flexible test, as has already been explained. Again, this element is not needed if the debtor has only one creditor.
These criteria have been carefully designed to ensure the review process takes full account of the situation and rights of both the borrower and the creditors, while also taking account of the public interest in restoring insolvent borrowers to solvency, enabling creditors to recover debts to the extent that the debtor's financial situation reasonably allows, and keeping people in their homes where that is reasonably practicable. The new court review will generally be heard by the specialist Circuit Court insolvency judges and will be heard in the High Court only where debts exceed €2.5 million. Delays are not expected. This new review is a major reform which represents a ground-breaking shift from the current position, and will significantly rebalance the position of creditors and debtors to ensure fair and balanced outcomes for both.
Section 12 removes a potential bar to some insolvent borrowers being able to make a PIA proposal. It relates to people formerly in mortgage arrears on their homes who have entered an agreement to restructure their mortgage. Under section 91(1) of the Act, a borrower must co-operate with the mortgage lender under the mortgage arrears resolution process, MARP, approved by the Central Bank. If the borrower does so, but is not able to agree a restructure with the mortgage lender, he or she is then eligible to propose a PIA. The question has arisen, however, as to eligibility where a borrower has co-operated in the MARP and has entered a MARP or non-MARP restructure but the restructure has failed or is unsustainable. It is clearly important that such a borrower can make a PIA proposal, and the amendment clarifies that they may do so if they have tried in good faith to comply with the restructure but remain insolvent.
A debt relief notice, DRN, is a debt settlement measure under the Act limited to an insolvent person whose net disposable income after reasonable living expenses is less than €60 per month, and who has assets of €400 or less excluding basic household goods or tools, and a car worth €2,000 or less. Currently, the person's debts may not exceed €20,000. Section 3 proposes to increase this limit to €35,000 per person. This amount has regard to the experience of MABS, which acts as the PIP equivalent for DRNs under the Act, that the amount of debt held by applicants otherwise eligible for a DRN is commonly up to €35,000.
This change will, I believe, open up the debt relief notice solution to a significant number of people who are not able to benefit from other statutory arrangements and whose debts, while relatively small, exceed the current limit.
Section 2 expands the important functions of the insolvency service regarding information, awareness raising and communication in personal insolvency and bankruptcy matters. Sections 23 to 26, inclusive, provide more detailed and effective powers for the insolvency service to supervise the activities of personal insolvency practitioners. The Act already provides powers for the ISI to intervene if there is a complaint or other reason to check for any misconduct or non-compliance by a personal insolvency practitioner with their duties under the Act. This is a reactive power carried out by inspectors whose functions and powers are already provided for in the Act. However, it does not provide in the necessary detail for a proactive supervision power which would allow for routine inspection without any suggestion of misconduct. This is already the best practice standard for equivalent regulatory bodies and the Minister considers it appropriate, given the important statutory functions of PIPs. The Bill, therefore, provides for the Insolvency Service of Ireland to appoint authorised officers who will carry out the proactive supervision function with the appropriate powers.
On the technical amendments in the Bill, I remind Senators that these clarify the existing rules for creditor voting but that where a personal insolvency arrangement proposal is rejected by creditors, the new court review will now be available. Their first objective is purely prudential and relates to a possible ambiguity identified in the wording of two sections of the Act, specifying the majority of creditors required to approve a debt settlement arrangement or PIA proposal at a creditors' meeting. The intention of the legislation and the interpretation applied by all stakeholders in practice is that such a proposal can be approved by creditors holding a specified majority of the overall debt. However, legal advice raised a possibility that the wording of sections 73 and 110 could be open to an alternative interpretation, that in addition the proposal must also be approved by a majority in number of all creditors, both for a DSA and for a PIA. Such an interpretation was never intended and would make it unnecessarily complicated to secure agreement on proposals. The relevant amendments remove the ambiguity and put the intended meaning beyond doubt. Their second objective is to clarify the detailed procedures which apply where creditors are deciding on a debtor's DSA or PIA proposal. Normally, the decision is taken by a vote at a creditors' meeting, the standard scenario, for which the Act sets out detailed procedures regarding notice, time limits, and so on. However, the Act also provides for two alternative scenarios. Where only one creditor is entitled to vote at a creditors' meeting, the creditor may notify its decision without the need to hold a creditors' meeting. Where a creditors' meeting is held but no creditor votes, the debtor's proposal is deemed to be accepted by the creditors. The Act does not always specify how the detailed procedures set out for the standard scenario would translate into the two alternative scenarios. The amendments clarify how that would be done.
I wish to underline the urgency of those changes in the Bill which arise from the Government's decision of 13 May. We are conscious that many of those in long-term mortgage arrears are increasingly at risk of losing their homes and are often highly stressed by their situation. It is important the court review and the flanking measures I have mentioned are put in place quickly and are fully available by September. Subject to Senators' deliberations, therefore, I hope the Bill will pass all Stages before the summer recess. I look forward to hearing Senators' views on the Bill and I am pleased to commend it to the House.
