Significant legislative changes are needed to allow “debt-for-equity swap” solutions for insolvent personal debtors facing difficulties repaying their mortgages, a High Court judge has said.
Scores of borrowers hoping for approval for these swaps to give them a fresh financial start in personal insolvency cases face uncertainty due to the judge’s ruling.
Mr Justice Denis McDonald found that the courts cannot approve “debt-for-equity swaps” in personal insolvency arrangements without the consent of the relevant secured creditor.
In a judgment on what is regarded as an important test case for the State’s personal insolvency regime, the judge found no provisions in the 2012 to 2015 Personal Insolvency Acts that would allow the court approve personal insolvency arrangements (PIA) that propose debt-for-equity swaps without the consent of the creditor.
There are some 100 similar cases pending before the courts.
Many more debtors who had been considering offering debt for equity swaps as part of their proposed PIAs had been awaiting the outcome of the action before formally entering the personal insolvency process.
The swaps are among the financial tools created in post-crash legislation to provide novel solutions to personal insolvency cases, but were awaiting formal sign-off by the High Court.
The judge said the debt-for-equity swaps could avoid difficulties arising from the “warehousing” of part of a mortgage debt – the option preferred by banks and other creditors – for repayment at a later date.
Warehousing can lead to “unwelcome insolvency” at the end of a mortgage term if a person has very limited finances available, said the judge. But he added that “significant amendments” were needed to the personal insolvency acts to allow debt-for-equity swaps to happen and that this was a matter “entirely for the Oireachtas”.
“If any such amendments were to be made, I would strongly urge that any such statutory provisions introducing new debt resolution solutions should be set out in sufficient detail to enable practitioners, debtors and creditors to identify and fully understand the precise scope and boundaries of any such solutions,” he said.
The judge made the findings when dismissing an appeal brought on behalf of Ms Denise Lowe against the Circuit Court's refusal to approve her PIA.
As part of her proposed personal insolvency arrangement, Bank of Ireland was offered just over 43 per cent equity in her family home, valued at €300,000.
Bank of Ireland rejected the proposal on grounds including it was unworkable, unsustainable, inherently unfair to it and did not satisfy certain requirements of the Insolvency Acts.
Ms Lowe, with an address at Ballinfull, Co Sligo, sought a significant write-off on her debts of €560,000. The court heard her biggest creditor is Bank of Ireland to which she owes €358,000 on her mortgage.
Under her proposed insolvency arrangement, she would make regular payments for 22 years on €170,000 of that mortgage. It proposed a debt-for-equity swap, where the bank would get 43.3 per cent equity, worth €130,000, in her home.
The remaining €58,000 would be written off.
In seeking to overturn the Circuit Court's refusal to approve her PIA, Keith Farry, for Ms Lowe's personal insolvency practitioner, argued the debt-for-equity solution provides significant benefits in cases where debtors lack the means to service repayments of their mortgage debts.
The proposal allows banks to benefit from an interest in a property that is likely to increase in value over time.
The bank argued that the existing legislation meant debt-for-equity swaps can only take place with the secured creditor’s consent, which, in Ms Lowe’s case, was not forthcoming.
