Langan v Personal Insolvency Acts 2012-2015 (Approved)

Factual and Procedural Background

This judgment concerns an application by a Personal Insolvency Practitioner ("PIP") on behalf of the Debtor pursuant to section 115A(9) of the Personal Insolvency Acts 2012-2015 for an order confirming the coming into effect of a Personal Insolvency Arrangement ("PIA") proposed by the PIP. The application was made directly to the High Court, rather than as an appeal from the Circuit Court.

The application was opposed by a creditor, Company A, which filed a notice of objection alleging, among other grounds, that the Debtor gave a preference to a solicitor, Attorney B, within three years preceding the issue of the Debtor's protective certificate. Attorney B claimed a first legal charge on a buy-to-let property in County Wexford, which was the subject of dispute.

The Debtor is a single individual with no dependants, residing at a one-bedroom apartment at [Number] Main Street, The City. The Debtor previously operated a furniture business through several companies, which were wound up following the recession. The Debtor had entered into personal guarantees for loans to these companies. The loans were eventually sold to Company A, which petitioned for the Debtor's bankruptcy in 2019. A protective certificate was issued to the Debtor on 23 November 2020.

The PIA was presented to creditors on 12 March 2021, proposing a twelve-month arrangement with secured creditors receiving a higher return than in bankruptcy, and unsecured creditors receiving a modest payment. Attorney B was listed as a secured creditor with a first legal charge on the Wexford property, while Company A's claims, totaling over €4 million, were classified as unsecured. Company A had registered a lis pendens over the property and had initiated High Court proceedings seeking declaratory relief regarding the property.

At the creditors' meeting, 100% of secured creditors voted in favour of the PIA, while 86% of unsecured creditors, consisting entirely of Company A's debt, voted against it. Consequently, the PIP made the present application to the High Court.

Attorney B made a successful application for leave to submit a late proof of debt and subsequently applied to prove his debt in court as a first legal charge. The court made an order on 8 March 2021, albeit with some ambiguity in its wording, effectively recognizing Attorney B's debt as secured by a first legal charge on the Wexford property.

Company A objected to the PIA on grounds including that the charge in favour of Attorney B was a preference prohibited by the Act and that the PIA unfairly prejudiced Company A by giving priority to an unregistered charge over its registered equitable mortgage and lis pendens. Company A also contended that the charge was not registered at the time of the creditors' meeting, rendering it ineffective.

The PIP conducted inquiries regarding Company A's security claims, but Company A did not respond with clear evidence of security. The PIP treated Company A's debt as unsecured in the PIA. The High Court was asked to confirm the PIA without determining the validity of Company A's alleged equitable mortgage, which was the subject of separate proceedings.

Legal Issues Presented

1. Whether the charge executed by the Debtor in favour of Attorney B on the Wexford property constituted a "preference" within the meaning of section 120(h) of the Personal Insolvency Acts 2012-2015, thereby invalidating the PIA.
2. Whether the treatment of Attorney B's charge as a secured debt in the PIA was valid despite the charge not being registered at the time of the creditors' meeting.
3. Whether the proposed PIA unfairly prejudiced the interests of Company A by giving priority to Attorney B's unregistered charge over Company A's registered lis pendens and alleged equitable mortgage.

Arguments of the Parties

Company A's Arguments

• The charge granted to Attorney B was a prohibited preference under section 120(h) of the Act, as it was given within three years prior to the protective certificate and substantially reduced the amount available to creditors.
• The PIA unfairly prejudiced Company A by prioritising Attorney B's unregistered charge over Company A's registered burden and equitable mortgage.
• The charge was not registered at the time of the creditors' meeting and thus conferred no interest under the Registration of Title Act 1964.
• The PIA ignored Company A's registered lis pendens and the provisions governing priority of registered burdens.
• The application by Attorney B to prove his debt in court contravened section 96(3) of the Act.
• The eligibility criteria regarding the aggregate amount of secured debts under section 91(1)(a) were breached.

Attorney B and the PIP's Arguments

• The charge was not a preference within the meaning of section 120(h) because it was executed pursuant to an agreement made more than three years before the protective certificate and was in respect of legal fees already incurred.
• The term "preference" implies intention, which is absent here; the charge was a legitimate security for services rendered in ongoing litigation.
• The lis pendens registered by Company A is a registrable burden but does not constitute security under the Act and cannot trump Attorney B's first legal charge.
• The charge was validly proven in court before the creditors' meeting, and the subsequent registration, though after the meeting, did not invalidate its treatment in the PIA.
• The PIP properly treated Company A's debt as unsecured after repeated attempts to clarify the nature of the security were met with no substantive response.
• The application by Attorney B to prove his debt was not a prohibited legal process under section 96(3) of the Act.
• The eligibility criteria concerning secured debts were not breached given the treatment of Company A's debt as unsecured.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analysed whether the charge granted to Attorney B constituted a "preference" under section 120(h) of the Act. It noted that the term "preference" implies a conscious decision to favour one creditor over others, typically with some improper intention. The court distinguished section 120(h) from company law provisions requiring intention, observing that the Act's wording suggests an objective test but still contemplates some qualitative examination of the nature of the act.

The court found that Attorney B's charge was executed pursuant to an agreement made more than three years before the protective certificate and was given as security for legal fees already incurred in substantial litigation. Attorney B had made clear that no work would be done without security, and the charge was not a preferential act but a legitimate commercial arrangement. Therefore, the charge did not contravene section 120(h).

Regarding Company A's claim to an equitable mortgage secured by a registered lis pendens, the court held that the lis pendens is a registrable burden but does not constitute security under the Act. The PIP was entitled to treat Company A's debt as unsecured given the lack of response to detailed inquiries. The court declined to adjudicate on the validity of the equitable mortgage, which was subject to separate proceedings.

The court addressed the issue of the registration of Attorney B's charge, finding that although the charge was not registered at the time of the creditors' meeting, the court had made an order on 8 March 2021 recognizing the charge as proven, and the registration was pending. The court held that the PIP was entitled to treat the charge as secured in the PIA, and the delay in registration was not fatal to this treatment.

The court found no contravention of section 96(3) of the Act by Attorney B's application to prove his debt, as this was not a prohibited legal process but a statutory right under the Bankruptcy Act.

Finally, the court rejected the contention that the eligibility criteria concerning secured debts were breached, given the treatment of Company A's debt as unsecured.

Holding and Implications

The court confirmed the coming into effect of the proposed Personal Insolvency Arrangement pursuant to section 115A(9) of the Personal Insolvency Acts 2012-2015.

The court held that the objections raised by Company A, including the allegations of a prohibited preference and unfair prejudice, were not established. The charge granted to Attorney B was not a preference, and the PIP was entitled to treat Company A's debt as unsecured given the circumstances.

The decision directly affects the parties by allowing the PIA to proceed, providing a framework for the Debtor's insolvency resolution. The court did not set new precedent beyond its interpretation and application of the statutory provisions in the context of the facts presented.