McNamara (a debtor)

Factual and Procedural Background

The applications before the court concern two interlocking personal insolvency arrangements proposed on behalf of a married couple, hereafter referred to as the Debtors. The applications were brought by a personal insolvency practitioner under section 115A of the Personal Insolvency Act 2012 (as amended by the 2015 Act) seeking orders confirming the coming into effect of the proposed arrangements. The key secured creditor opposing the applications is a financial entity, hereafter referred to as Creditor A, which holds security over the Debtors' family home located in County Meath. The Debtors have been experiencing financial difficulties since the early 2000s, initially due to issues in collecting royalties and subsequently compounded by reduced household income and the recession. The Debtors have multiple creditors, including secured and unsecured creditors, and have proposed arrangements involving significant write-downs of secured debt and structured repayments over a 72-month term, the maximum permitted under the Act.

The procedural history includes initial applications filed in 2017, adjournments pending a determination on the correct party to bring the applications, and amendments to notices of motion to clarify that the practitioner brought the applications on behalf of the Debtors. Objections were filed by Creditor A, and extensive affidavits and hearings ensued, culminating in the present judgment delivered in August 2019.

Legal Issues Presented

1. Whether the applications under section 115A(9) of the Personal Insolvency Act 2012 can be confirmed, specifically whether the statutory requirements for service and creditor approval have been met.
2. Whether the classification of creditors into appropriate classes for voting purposes complies with the statutory test, particularly the status of Creditor A, First Citizen Finance DAC, the Revenue Commissioners, and an educational institution creditor.
3. Whether the proposed arrangements provide a reasonable prospect that the Debtors will resolve their indebtedness without recourse to bankruptcy.
4. Whether the conduct of the Debtors in the two years prior to the issue of protective certificates weighs against confirmation of the arrangements.
5. Whether the proposed arrangements unfairly prejudice the interests of Creditor A or are inequitable.
6. Whether discrepancies between the Debtors' financial statements raise doubts as to the accuracy and completeness of their disclosures, affecting eligibility and fairness under the Act.

Arguments of the Parties

Creditor A's Arguments

• There was inadequate proof of service of the section 115A applications on all statutory notice parties.
• The applications may not have been brought within the prescribed time, though this point was not pursued at hearing.
• The practitioner's certificate of voting contained errors that should be fatal to the applications.
• The duration of the proposed arrangements is uncertain due to conflicting dates, rendering the arrangements fundamentally flawed.
• Failure to comply with mandatory requirements of the Act, including proper disclosure of secured debts and creditor elections to treat debts as unsecured.
• The treatment of certain debts, especially the classification of debts owed to Permanent TSB, is inconsistent and incorrect.
• The proposed arrangements unfairly prejudice Creditor A, particularly due to a significant write-off of debt and the conversion of variable interest rates to a low fixed rate for an extended period.
• Concerns that the Debtors' Prescribed Financial Statement (PFS) is inaccurate or incomplete, with discrepancies compared to a prior Standard Financial Statement (SFS), including undervaluation of inheritance and omission of rental income.
• There is no reasonable prospect that the arrangements will enable the Debtors to repay debts to the extent their means permit.
• The bankruptcy comparison provided by the practitioner is flawed and understates the potential returns to creditors in bankruptcy.
• The Debtors' conduct in the two years prior to the issue of protective certificates, including payments below contractual obligations, weighs against relief.
• Creditor A contends they have not been afforded full voting rights, though this was not pursued at hearing.
• Allegations that the Debtors unreasonably rejected an offer to voluntarily surrender the family home.

Practitioner's and Debtors' Arguments

• The affidavit of service, despite a technical irregularity in the jurat, is valid and sufficient to satisfy service requirements.
• The errors in the voting certificate are not fatal; the court may consider additional evidence and the overall vote overwhelmingly rejected the proposed arrangements.
• The duration errors in the proposed arrangements are obvious and inconsequential and can be addressed in the confirmation order.
• The judgment mortgages alleged to be undisclosed have been satisfied, removing concerns about non-disclosure.
• The treatment of Permanent TSB as an unsecured creditor is correct and accepted by that creditor.
• The classification of creditors follows established legal principles, with secured creditors holding security over different properties constituting separate classes; the educational institution does not constitute a separate class.
• The Revenue Commissioners, although voting on a preferential debt, lose preferential status by voting but remain a separate class due to differing rights and treatment under the arrangements.
• The proposed arrangements provide a reasonable prospect of repayment without bankruptcy, supported by detailed financial projections showing a modest surplus during the term and a significant surplus thereafter.
• Past poor payment performance is explained by the Debtors and mitigated by substantial payments since mid-2017.
• The bankruptcy comparison, adjusted for a 10% forced sale discount, shows better returns under the proposed arrangements for Creditor A and unsecured creditors.
• The proposed interest rate and fixed rate period are justified given the Debtors' means and the nature of Creditor A as an investor, not a lending bank.
• The absence of evidence on the cost of funds to Creditor A undermines the objection regarding interest rate unfairness.
• The potential for future appreciation in property value is speculative and unsupported by evidence; the arrangements must be assessed on present means and valuations.
• The discrepancies between the SFS and PFS raise legitimate concerns which the Debtors are obliged to explain; however, the court is prepared to allow an opportunity for further affidavit evidence before deciding on dismissal.
• The statutory objectives of preserving the family home and enabling orderly debt resolution justify a degree of indulgence and a practical approach to errors and discrepancies.

Table of Precedents Cited

Court's Reasoning and Analysis

The court first addressed the procedural objection regarding service of the applications, finding the affidavit of service valid despite a technical irregularity in the jurat, and admitting it under the court's discretion. The court then examined the constitution of creditor classes for voting purposes, applying established legal tests from precedent. It rejected the practitioner's attempt to classify the educational institution creditor as a separate class, reasoning that its rights are identical to unsecured creditors. It accepted that First Citizen Finance DAC, holding security over lands unaffected by the relevant provisions, constitutes a separate class distinct from Creditor A, whose security is confined to the family home.

Regarding the Revenue Commissioners, the court undertook a detailed statutory analysis. It acknowledged that voting by a preferential creditor results in loss of preferential status under section 81(8) of the Bankruptcy Act 1988. However, it found no inconsistency between this and the express right granted by section 92(5) of the Personal Insolvency Act for excludable debts to vote. Consequently, the Revenue Commissioners' vote counts, but their debt loses preferential ranking and is treated as unsecured. The court further held that the Revenue Commissioners form a separate class due to their distinct rights and treatment, including the right to remain outside the arrangement and the fact they will be paid in full, unlike other unsecured creditors.

The court considered objections of unfair prejudice by Creditor A, particularly concerning the significant write-down of debt, fixed low interest rate, and alleged underestimation of property value appreciation. It found these objections unpersuasive, noting the write-down reflects the current property valuation and the Debtors' means, the fixed interest rate is appropriate given the Debtors' financial capacity and the nature of Creditor A as an investor rather than an original lender, and that property value appreciation is speculative and unsupported by evidence.

On the sustainability of the arrangements, the court reviewed detailed financial projections showing modest surpluses during the term and a significant surplus thereafter, supporting a reasonable prospect of repayment without bankruptcy. While acknowledging the Debtors' poor payment history prior to the issue of protective certificates, the court accepted the explanations provided and noted substantial payments made since mid-2017, concluding the past conduct does not preclude confirmation.

The court addressed discrepancies between the Debtors' Standard Financial Statement and Prescribed Financial Statement, particularly concerning the value and income from an inheritance. It found these discrepancies raise doubts about full disclosure and compliance with statutory requirements. Given the importance of accurate disclosure, the court determined that the Debtors, specifically Mr. McNamara, must provide further affidavit evidence explaining the discrepancies before the applications can be confirmed. The court emphasized the legislative purpose of protecting the family home and enabling orderly debt resolution, balancing procedural fairness with practical considerations.

Regarding the bankruptcy comparison, the court accepted the practitioner's revised comparison using a 10% discount rate for forced sale costs, concluding that Creditor A and unsecured creditors would receive better returns under the proposed arrangements than in bankruptcy. The court rejected arguments for a 5% discount rate based on outdated actuarial reports and noted the absence of evidence from Creditor A on its cost of funds. It also clarified that a mathematical difference alone does not establish unfair prejudice, referencing relevant precedent.

Holding and Implications

The court's decision is to ADJOURN the applications to allow the Debtors, specifically Mr. McNamara, an opportunity to file further affidavit evidence addressing the discrepancies between the Standard Financial Statement and the Prescribed Financial Statement, particularly regarding the value and rental income of the inheritance.

Pending the filing and satisfactory explanation in the further affidavit, the court is unable to confirm the proposed arrangements under section 115A(9) due to concerns about whether the Debtors' means have been fully brought to bear and whether Creditor A will suffer unfair prejudice.

The direct effect of this decision is to delay confirmation of the personal insolvency arrangements and preserve the possibility of the Debtors losing possession of the family home if the applications ultimately fail. No new precedent is established beyond the application of existing principles to the facts of this case.