Personal Repayment Plan and
the Court
Josh Hogan
Nicosia, 6 November 2015
Seminar on Cypriot Insolvency Framework
Why Ireland’s experience
is relevant
 Common law jurisdiction with legal
system similar to Cyprus
 Financial crisis resulted in similarly high levels of
over-indebtedness and non-performing loans
 New personal insolvency regime in Ireland
operating for 2 years
 Debt Relief Order and Personal Repayment Plan
in Cyprus have many similarities to Debt Relief
Notice and Personal Insolvency Arrangement in
Ireland
Backdrop to insolvency reforms
Ireland
Cyprus
Percentage of loans in 10.4% (Q4 of 2011)
arrears
59% ( April 2015)
Unemployment
14.3% (Q4 of 2011)
16.3% (July 2015)
Bankruptcies in year
of new regime
2012: 35
2015: 67 (as of 30
September 2015)
Arrears remain a major problem in
Ireland
Central Bank of Ireland residential mortgage
statistics as of end-June 2015:
 70,299 principal home loans (9.3%) in arrears
over 90 days
 26,057 buy-to-let loans (19%) in arrears over 90
days
 Changing creditor profile due to loan sales:
46,442 mortgage accounts (PDH and BTL) held
by non-banks. Of this, 19,539 are in arrears of
more than 90 days. New 2015 law enacted to
regulate credit servicing firms in Ireland
Insolvency reform in Ireland
 Law Reform Commission comparative
legal analysis
 Little precedent for including secured
debt in resolution plans
 Challenging environment for reform
– financial system fragile
– high numbers in arrears,
widespread negative equity
– multiple stakeholder interests
– Troika deadlines and assistance
Ireland’s reformed personal insolvency
regime
 Personal Insolvency Act 2012
– modernised some elements of bankruptcy
– introduced three new procedures as alternatives
to bankruptcy
– established the Insolvency Service of Ireland
– provided for regulation of personal insolvency
practitioners (140 now licensed)
– created a new category of specialist judge: 6
appointed to deal with debts of up to €2.5 million
Insolvency Service of Ireland
Overview of the processes
IRELAND
CYPRUS
Bankruptcy
3 years
3 years
Debt Relief Order
(Debt Relief Notice in
Ireland)
€35,000 max
3 years
50% surrender of additional
assets/income
No guarantor relief
€25,000 max
1 year
No surrender of additional
assets/income
Guarantor relief
Personal Repayment
Plan
(Personal Insolvency
Arrangement in Ireland)
€3m cap secured debts
6 years
65% creditor approval or
court override
No guarantor relief
Unlimited debts
5 years
65% creditor approval or
court override
Guarantor relief
Debt Settlement
Arrangement (Ireland
only)
Unsecured debts only
5 years
65% creditor approval
No guarantor relief
IRL: personal insolvency applications since
launch in Q4 2013
England/Wales 2014
Bankruptcies
20,318
Debt Relief Order
26,688
Individual Voluntary
Arrangement
52,190
Total
99,196
Benefits of personal insolvency law reform
 Debtors
– physical and mental health, social and economic
inclusion, dependants
– ‘Fresh start’ (common law countries): "One of the
primary purposes of the Bankruptcy Act is to 'relieve
the honest debtor from the weight of oppressive
indebtedness, and permit him to start afresh free from
the obligations and responsibilities consequent upon
business misfortunes'. This purpose of the act has been
again and again emphasized by the courts as being of
public as well as private interest, in that it gives to the
honest but unfortunate debtor who surrenders for
distribution the property which he owns at the time of
bankruptcy a new opportunity in life and a clear field
for future effort, unhampered by the pressure and
discouragement of pre-existing debt." (Local Loan Co.
v Hunt 292 US 244, per Sutherland J (1934))
– ‘Earned start’ (civil law countries)
Benefits of personal insolvency law
reform
 Creditors
– fair distribution in orderly and rational process
– maximise recovery to the extent the means of the
debtor reasonably permit (reduce collection costs
and avoid depressed asset sales)
 Economy / society
– consumer spending
– encourage responsible lending and investment
– cost-effective alternative to State spending (e.g.
welfare) / tax relief
– entrepreneurship (EU Commission A second
chance for entrepreneurs)
Recent European reforms
 No established international best practice in
personal insolvency law but recent reforms in
Europe:
– aim to balance social policy considerations
(e.g. in relation to principal private residence)
with need to maintain payment discipline and
avoid moral hazard
– introduce statutory workout processes to
allow individuals earn a fresh start
– recognise importance of unsustainable
residential mortgage debt
International perspectives
 World Bank Report on the Treatment of the
Insolvency of Natural Persons (Dec 2012)
– no recommendations, but useful observations
 IMF Working Paper Dealing with Private Debt
Distress in the Wake of the European Financial
Crisis: A Review of the Economics and Legal
Toolbox (Feb 2013)
– identifies “basic design features” for an
economically efficient personal insolvency
law
IMF-identified design features for
reform
 Allocate risks among parties in a fair and
equitable manner
 Provide a fresh start through discharge of
financially responsible individuals from the
liabilities at the end of insolvency proceedings
(typically after 3-5 years)
 Establish appropriate filing criteria to make
insolvency procedures accessible to individual
debtors while minimizing abuse
IMF-identified design features for
reform
 Impose automatic and temporary stay on
enforcement actions with adequate safeguards
for creditor interests
 Set repayment terms that accurately reflect the
debtor’s capacity to repay to ensure an effective
fresh start
 Recognize foreign proceedings and enable crossborder cooperation to avoid bankruptcy tourism
PIA / PRP
 Debtor must be cash-flow insolvent with no
likelihood of becoming solvent within 5 years
 Once in lifetime (IRL), once in 20 years (CY)
 Flexibility as to terms of arrangement and how debts
are treated, subject to mandatory requirements
 Debtor name on public register
 Creditor enforcement rights restricted
 Successful completion:
– 100% discharge from unsecured debts
– discharge from secured debts
“to the extent specified” in
arrangement
Advantages for debtor of PIA / PRP
 Fresh start: average write-down under PIA in Q3
2015 was 83.7% (unsecured), 19.7% (secured)
 Flexible - adapted to specific circumstances of
debtor
– control over assets / income to be surrendered.
No automatic loss of home or assets unlike
bankruptcy
– no minimum discharge period
 Statutory protections (e.g. IP advice, allowances for
reasonable living expenses)
 Avoid bankruptcy restrictions (and stigma?)
PIA / PRP process
1
2
3
4
5
• Appointment of insolvency practitioner
• Protective certificate (70 days Ireland, 95
days Cyprus)
• Arrangement negotiation and approval
• Implementation and monitoring
• Termination / completion
Role of Court in PC approval
 Consider application for protective certificate and
accompanying documentation (including
certificate from Insolvency Service (“IS”))
 Court must be satisfied re
– eligibility criteria
– other application requirements
 Court can treat certificate by IS as evidence
that eligibility criteria are met and
application documentation is in order
One PC in 12 months
 Debtor ineligible for PIA if he/she has been issued PC
within previous 12 months
 Exception where court satisfied debtor’s insolvency
due to “exceptional circumstances or other factors
which are substantially outside the control of the
debtor” and it would be “just” to permit the debtor to
propose PIA
 Extensive use of exception by courts to avoid
prejudice to debtors
 Corresponding exception does not appear to be
present in Cypriot legislation – are other mechanisms
available to allow some flexibility?
Role of court during PC period
 Court has limited role but may be called upon to:
– resolve disputes regarding proof of debts
– hear creditor appeal against application of PC
to that creditor (irreparable loss?, unfair
prejudice to other creditors?)
– consider applications for extension (40 days)
of protective certificate (debtor and IP acted
in good faith and with reasonable
expedition?, likelihood of viable proposal?)
Secured debt restructuring
 Case-by-case restructuring of secured debt and
security
 Can delay/avoid crystallisation of negative equity
 Restructuring might comprise:
– Interest-only during arrangement
– Extension of maturity
– Deferral of payments during arrangement
– Change of interest rate or interest basis
– Debt for equity swap
– Capitalisation of arrears
– Principal write-down (with or without clawback)
 ‘Split mortgage’ popular in Ireland
Creditor and debtor protections
 Creditor protections for ‘economic value’ of security:
– if property sold, sale proceeds payable to secured
creditor
– if property not sold, any principal write-down:
 cannot, unless secured creditor agrees otherwise,
reduce principal below value of security
 will, unless secured creditor agrees otherwise, be
subject to 20 (IRL) / 10 (CY) year clawback
where debtor sells property for value greater than
the value attributed for purposes of PIA
 Unless costs ‘disproportionately large’, debtor not
required to dispose of interest in, or cease to occupy,
primary residence
Voting in PIA / PRP
 General rule: voting rights are proportionate to
amount of debt outstanding on day PC was
issued
 Majority by value only of creditors voting not
value plus number
 3 proportions relevant: ‘No’ votes must not
exceed:
 35% of ‘total amount’ of debt
 50% secured debt
 50% unsecured debt
Voting in PIA / PRP
 For voting purposes, value of secured debt is
lesser of
 market value of security or
 amount of debt on day PC was issued
 Cypriot law does not distinguish between value
of ‘property the subject of security’ and the value
of ‘security’.
 Irish law assumes up to 10% discount on value of
property to allow for selling costs etc.
Voting in PIA / PRP
 50% unsecured vote can include negative equity /
sale shortfall portion of secured debt provided
such portion abates equally with unsecured debt
and will be discharged at end of arrangement
 No quorum requirement for meeting. Connected
creditors can only vote against proposal.
 Proxy voting common in Ireland
Reasons why creditors vote Yes or No
YES
NO
Better return than alternative Bankruptcy alternative not
of bankruptcy
credible / equally attractive
Possibility of uplift where
debtor circumstances
improve
Proposal does not provide
realistic return for creditor
having regard to debtor
circumstances
Fair burden-sharing between Loss of control compared to
creditors
non-statutory restructuring
Legal certainty/finality
Concerns about moral
hazard/strategic default
Clawback excessive pension
contributions
3rd party servicing /
securitisation restrictions on
restructuring
Role of court in PIA / PRP approval
 After approval by creditors’ meeting, IP to notify
to creditors and IS
 IS to notify court and furnish copy of
arrangement to court (CY: IS to apply to court to
ratify arrangement)
 Where no objection lodged by creditor (CY: or
guarantor) within 14 days (IRL) / 21 days (CY) of
IP’s notice, court proceeds to consider whether to
approve proposal
Role of court in PIA / PRP approval
 Court must be satisfied that
– eligibility criteria are met
– terms of proposal meet statutory
mandatory requirements
– terms of proposal do not release
excluded debt, excludable debt
– requisite majority of creditors approved
proposal
 Court can rely on IP certificates re above
 Court may hold hearing or request IS to provide
information “for the purposes of its arriving at a
decision”
Other functions of court in PIA / PRP
 Objection by creditor to coming into effect of
DSA/PIA within 14 (IRL) / 21 (CY) days of notice
 Application by creditor or PIP to court for
termination of DSA/PIA
– Early termination will lead to full restoration
of debts (but not interest during PRP in CY)
unless arrangement provides otherwise or
court orders otherwise
 Approval of modifications
 Excessive pension contribution order
 Prosecutions / IP regulatory matters
Implementation Issues for Irish courts
 Level of court input greater than initially
expected
 Most IPs are not lawyers, quality of
documentation received by courts was frequently
inadequate
– Improved by
 IS ‘hand-holding’ on initial applications
 IS training and circulars on court practice
for IPs
 standardisation of documentation under
PIA Protocol
 court electronic case management
PIA Protocol
 Developed by stakeholders with IS oversight
(including extensive IS legal input)
 UK precedent: Straightforward Consumer IVA
Protocol
 Standard terms and conditions
– Reduces time / cost
– Improves predictability
 Commercial terms (e.g. dividends and secured debt
restructuring) are specific to each arrangement
 Creditor and PIP ‘buy-in’
Implementation Issues for Irish
courts
 Frequency of hearings / oral submissions
required of IPs in court leads to high additional
costs
– What is court preference for means of
receiving information?
– written submissions?
– IS to liaise with IPs to obtain missing
information / clarifications for court?
– hearings?
 Note - IS in Cyprus can represent debtor in
court
Implementation Issues for Irish
courts
 New area of law with heightened risk of
inconsistent interpretation and application by
stakeholders and courts
– IS plays important role in identifying issues of
general importance, makes legal submissions
to court and informs IPs about court
decisions (e.g. PIA voting)
– Specialist judges with concentration of
expertise
Implementation issues for Irish
courts
 How to integrate the new personal insolvency
regime with existing court processes?
– Debtor must try PIA before bankruptcy
– Courts can defer bankruptcy applications and
repossession proceedings so debtor can
consult with IP to consider PIA
– Official Assignee in Bankruptcy amalgamated
with IS
– But: imperfect links with between PIA and
bankruptcy, no link with examinership (no
equivalent of Cypriot ‘Co-ordinated
Repayment Plan’)
Implementation issues for Irish
courts
 Court could not override creditor rejections of viable
proposals
– ‘bank veto’ (i.e. voting power of creditors)
criticised
– creditors perceived to behave ‘irrationally’
– debtors and PIPs deterred from seeking PIA
– €500 PIA application fee waived
– €750 payment by IS to IP where viable proposal
rejected (42 payments for Q2 2015)
– amendments made in 2015 (not yet in force) to
provide for non-consensual PIA
Non-consensual PIA / PRP
 Court empowered to impose arrangement on
creditors notwithstanding rejection at creditors’
meeting
 Arrangement must provide for debtor to retain
primary residence and (CY only) dispose of all
‘liquid assets’
 Restricted eligibility:
– Debts must include secured debt over
primary residence (€300k cap on value in CY)
– CY only: €350k max debts, €250k max assets
(excl primary residence)
Non-consensual PIA / PRP
 Time-limited:
– CY: debtor is insolvent due to reduction in
income of 25% or more since 2009 because of
events outside debtor’s control (presumption
any reduction between 2012-2015 due to
financial crisis)
– IRL: debtor was in arrears on primary
residence mortgage debt on 1 Jan 2015 (or
had restructured the debt to deal with arrears
before then)
Non-consensual PIA / PRP
 Approval:
– Court must be satisfied as to range of matters,
notably:
 arrangement enables creditors to recover
debts due to them, to the extent that means
of debtor reasonably permit (IRL) /
provides creditors same or better outcome
as bankruptcy (CY)
 IRL: at least one ‘class’ of creditor voted in
favour and no unfair prejudice for any
interested party (like examinership
approval test)
More reform?
 Personal Insolvency Act 2012 amended 4 times
already
 1 year bankruptcy (currently 3)?
– recommended by parliamentary committee
after public consultation
 3 year income payments order (currently 5)?
Personal Repayment Plan and
the Court
Josh Hogan
Nicosia, 6 November 2015
Seminar on Cypriot Insolvency Framework