Capital punishment for even the most heinous crimes has been abolished in most western democracies with some significant exceptions such as the USA. In regard to debt however, the USA has a most benign set of laws dealing with insolvency both personal and corporate. Contrasting significantly in both of these matters is the Republic of Ireland. The death penalty has been long abolished in Ireland but the personal insolvency regime there has been described by many august authorities as unpractical, unused, excessively costly and overly penal.
In reality Ireland is not only out of sync with the USA. Its bankruptcy laws compare unfavorably with most European countries and in particular with its twenty six partner member states of the European Union. The hallmark of American law is the concept of a fresh start, debt forgiveness and encouragement of an enterprise culture. It is almost like winning a ‘badge of honour’ to have been declared bankrupt in the USA and to have been made bankrupt multiple times does not preclude the possibility of bouncing back and trying again. Ireland on the other hand is still mired in a mindset of punishment and deterrence for those who are deemed to have transgressed financially.
The new Fine Gael led government now has the opportunity to change all of that. Fine Gael’s pre-election policy paper on personal debt stated that it proposed to overhaul Irish bankruptcy laws and to establish new legal processes to deal with personal and commercial over-indebtedness to avoid the bankruptcy process in the first instance. It proposed to introduce a flexible bankruptcy system similar to Northern Ireland’s system that would allow the courts to set bankruptcy terms depending on each individual’s circumstances. It would consider whether there had been any fraud or undue recklessness on the part of the insolvent individual or whether the insolvency occurred simply as a result of unavoidable changes in the debtor’s circumstances. Where it was established that the debtor had engaged in reckless or fraudulent dealings, a restriction order could be issued in conjunction with a longer bankruptcy period punish the debtor and to deter against such behaviour in the future.
Fine Gael proposed to develop an out of court debt settlement system similar to the current system in Northern Ireland that would offer a route for businesses who are owed money to demand payment using an officer of the courts to force a settlement and that would result in no implications for the debtor if payment were made. It also promised to introduce an Individual Voluntary Debt Plan (IVDP) similar to the UK’s Individual Voluntary Arrangement (IVA) which would be a new legally binding arrangement. Under the IVDP an indebted individual and his or her creditors would agree to have a plan drawn up by a certified insolvency professional or practitioner to restructure the individual’s outstanding debts. The IVDP would be voted on by creditors and would protect the individual from interest charges and the threat of enforcement while outstanding debts would be restructured and worked out.
For small firms encountering debt problems, Fine Gael promised to introduce what it called a Commercial Voluntary Debt Plan (CVDP) which would be similar to the Company Voluntary Arrangement (CVA) in the UK. The new system would help small firms struggling in the recession to restructure their debt and business with the help of professional insolvency practitioners while under the protection of the State, thus avoiding the excessive cost of the examinership process.
It now falls to the new coalition government of Fine Gael and Labour to enact appropriate new personal insolvency legislation in Ireland in accordance with its policies. Much of the heavy lifting was undertaken by the Law Reform Commission (LRC) which finalized its proposals for change to the insolvency laws when it published its final report on Personal Debt Management and Debt Enforcement in December 2010. The LRC went one step further when it incorporated as an appendix to that report a Draft Insolvency Bill 2010. Much credit must go to the Green Party which unfortunately lost all of its seats in the general election in February 2010. After pushing for reform in the area of personal insolvency it found itself out of office but before it could introduce or enact new legislation. The financial tsunami currently engulfing Ireland at a sovereign level and has obviously diverted the attention of government from the travails of the personally insolvent citizen. However, the IMF, ECB and EU troika have demanded the reformation of Irish personal insolvency law and have set a deadline of March 2012 for implementation.
The proposals contained in the LRC’s draft bill are quite radical. They say, for example, that debtors should not be jailed for non-payment of debt even in instances where the debtor can afford to pay but refuses to do so. The proposed sanction is community service and not jail time.
This is not the only radical proposal. The draft bill provides for what is effectively debt forgiveness although it is clear that the use of the term ‘debt forgiveness’ is studiously avoided. In fact in the 440 pages report the word ‘forgiveness’ appears only three times and two of those are quotations from other sources. It appears that the report adheres to the letter of the words of the former and now-retired Fianna Fail Minister of Justice Minister Dermot Ahern when he ruled out ‘debt forgiveness’ for ordinary people in May 2009 when the LRCs interim report was launched.
In spite of the heavy hand of such political direction, the LRC has shown considerable courage and enlightenment in ensuring that the spirit of its final report and the draft bill contain generous provisions for what is debt forgiveness in all but name. In particular the proposals for insolvent debtors with no income and no assets (NINA) provide for what are described as Debt Relief Orders. In effect qualifying debtors would be able to have their unsecured debts totally written off within a twelve months period so that they could start afresh. It is likely that there would be a ceiling on the total quantum of debts. Above that ceiling Debt Relief Order would not be available for the insolvent debtor but the ceiling has not been specified as yet. In the UK the debt ceiling is £15,000.
The principal provision proposed by the LRC was the setting up of a Debt Settlement Arrangement (DSA) scheme where insolvent debtors would pay what they could afford for a period not exceeding five years, after which the unpaid balances of their debts would be discharged in their entirety. Under this scheme at least 60% of voting creditors as measured by the value of unsecured debts would have to approve the DSA for it to be approved and binding on all unsecured creditors, including those who chose not to vote on the proposal.
Other provisions proposed by the LRC included setting up a Debt Enforcement Office (DEO) to arrange non-judicial settlement of debts; setting up a Debt Settlement Office (DSO) as an integral part of the DEO to license and monitor insolvency practitioners, to be known as Personal Insolvency Trustees and establishing a regulatory regime to control debt collection and debt advice bodies.
While the LRC itself originally excluded detailed consideration of and recommendations for amending Irish Bankruptcy law (or formulating new law) from its scope and terms of reference, it has in fact and in spite of itself, made thirteen specific recommendations (provisions) relating to bankruptcy in an appendix to the report – on top of its clear statement recognizing the need to reform the Bankruptcy Act 1988. A footnote to that appendix makes fascinating and somewhat incredulous reading: ‘The commission has not included these provisions in the draft Personal Insolvency Bill in Appendix A as it understands that a new legislative framework to reform the Bankruptcy Act 1988 is currently (December 2010) under consideration’.
It seems clear that the LRC is extremely dissatisfied with the lack of political progress in taking steps to address the reform of bankruptcy law, an enormous task which could take many more years to accomplish, even if the entire resources of the LRC were assigned to it. Can the vision, energy and commitment of a new government shorten that timescale? It would be astounding and indeed unacceptable if Ireland’s draconian bankruptcy law, though rarely used, could remain the law of the land for another half decade or more. The IMF, ECB and the European Commission were able to descend on Dublin at short notice and in a matter of weeks agree measures to tackle the insolvency problems of the Irish banks and of the sovereign state itself. The competence, urgency and energy displayed so far by the new Fine Gael and Labour coalition government gives some hope for optimism. For the hard pressed insolvent Irish consumer the hope is that the penalty for debt is neither capital punishment nor a life sentence.