The Impact Of The Personal Insolvency Act On Loan Portfolio Purchasers

Introduction

The decision of the High Court in Re Hayes (a debtor) ([2017] IEHC 657), illustrates the impact that the Personal Insolvency Act 2012 (as amended) (the "Act") may have on secondary purchasers of loan portfolios.

Baker J. held that when determining whether any personal insolvency arrangement ("PIA") would be unfairly prejudicial to a creditor regard shall be had to the particular financial profile of the creditor. As the creditor in Re Hayes was an investment fund, and not an originating lender, Baker J. held that unfair prejudice should be assessed by reference to the return on that creditor's investment, rather than by reference to its future funding needs.

Background

Jacqueline Hayes and her husband, James Hayes, had difficulties in repaying a loan secured by a mortgage over their family home. The loan was part of a portfolio that had been bought by Shoreline Residential DAC from IBRC Limited (in special liquidation).

The borrowers, who were in financial difficulties, engaged a personal insolvency practitioner to formulate PIAs in relation to their debt. The PIAs outlined certain proposals for the repayment of the Shoreline loan, including that: (i) the balance of €323,626 be written down to €190,000 (the value of the family home); (ii) there would be interest-only payments for the 6 year period of the PIA; (iii) the term would be extended from 18 years and 2 months to 27 years; and (iv) the interest would be fixed for the entire term at a rate of 3.65%.

The PIAs were rejected as unsustainable in the long term by Shoreline at the creditors' statutory meeting. This objection was upheld by the Circuit Court. The borrowers then appealed the Circuit Court decision to the High Court.

High Court Decision

Baker J. in the High Court allowed the appeal and confirmed the proposed PIAs.

Section 115(9)(b) of the Act provides that a court may confirm a PIA only where it is satisfied, amongst other things, that: (i) the debtor is reasonably likely to be able to comply with the terms of the PIA; and (ii) the proposed arrangement is not unfairly prejudicial to the interests of any interested party.

Sustainability of the PIA

Baker J. held that the PIAs were, in the circumstances, sustainable and that the Act does not require the Court to assess the likely circumstances of a debtor after the six-year term of a proposed PIA. On this basis, she dismissed Shoreline's argument that the PIAs were unsustainable as they could result in the borrowers...