Insolvency service statistics suggest it is unfit for purpose

Comments by the chief executive of the Insolvency Service of Ireland arising from its third-quarter statistics are more worrying than the abject failure of the processes set out in the personal insolvency Act .

On research commissioned by ISI, its chief executive Lorcan O’Connor said last week: “We met many people who didn’t actually realise that they were, in fact, insolvent.” He also states “application fees were raised by some people as a potential barrier, so we have removed them” and “when a PIP takes on your case, you get protection from your creditors, you may have more to spend at the end of each week on food and day-to-day expenses, and you will be on a path to a fresh start.”

On the number of people in distressed debt using the reliefs available in the Personal Insolvency Act 2012, the ISI website also states: “Numbers are low but increasing month-on-month, with an almost twofold increase in the number of protective certificates and personal insolvency arrangements agreed when compared to Q2; an overall acceptance rate of 72 per cent by creditors for DSA and PIA solutions; and a significant increase in bankruptcies. Figures also show that the ISI is dealing with nearly €1 billion of debt so far this year.”

The report goes on to illustrate its success in attracting growth in the number applications in various categories of relief, describing it as a 5,400 per cent quarter on quarter increase in successful arrangements. That in real terms is a rise from 1 to 55 between the last quarter of 2013 and the first quarter of 2014.

Interestingly, that rate of improvement has slipped to 6 per cent between the second quarter and third quarter of this year, with a drop in the number of debt relief notices and debt settlement agreements in that time.

The figures reported – 137 bankruptcies in the months July to end September, with only 131 arrangements being approved – tell a more accurate tale of the failure in the process of debt resolution in Ireland following Alan Shatters so-called "seismic shift" in the reliefs available to creditors and debtors to resolve problem debt as provided for in the Act.

The comparable figures for the year 2012 of 35 cases in the teeth of the collapse of the economy perfectly illustrate the failure of the Act, but more importantly question the ability of the ISI to address failures with the process by identifying its flaws and suggesting alternatives.

At the very outset, we need to ask, during this time of austerity if we are getting value for money from the ISI.

In a written response to a parliamentary question raised by Pearse Doherty in April 2013, then minister for justice Alan Shatter confirmed that staffing levels at the ISI would be 91, and it would have a budget for that year of €7.4 million. From its own figures, in 2013 the ISI concluded just one debt settlement arrangement. In its defence, the Act was not operational for the whole year, just the last quarter.

However, the figures for the year to date in which the service has been operational for 12 months are stark: 311 arrangements in total, with (taking the 2013 budget) an average cost to the state of €23,794 each. To put that figure in context, the debt resolved in the 172 debt relief notices has as its upper limit €20,000. The State would have been better off paying all the debt owed and given the debtors some money for a holiday, rather than set up the ISI to deal with it.

The workload cannot be an issue either – 91 staff members processed an average of 3.41 cases each. Of course there are staff members employed in administrative and secretarial roles, and also to make sure that the PIPs and other service providers are properly qualified, but in times like these we cannot afford passengers in the public sector, particularly when it is clear they are being paid to implement a process that does not and cannot function because of constraints in the Act.

In circumstances where the chief executive of Bank of Ireland has said on the record to the Joint Oireachtas Committee on Justice that it is not going to approve any attempt by a debtor to write down secured debt (irrespective of the value of the security held), the proposed sanction of the ISI to name and shame recalcitrant banks must have them shaking in their shoes. Mr O'Connor says that he will get around to doing the naming and shaming in March of next year if they don't pull up their socks.

This would be ridiculous if it wasn’t so serious.

I completely agree with Mr O’Connor’s statement that the process shouldn’t be a “stick with which to beat the banks”. The reality however is that because of the completely unfettered power and control exercised by the banks over the process, the ISI is simply a bystander to arrangements being reached, and is utterly incapable of exercising any influence over the failures in the system.

As the head of ISI Mr O’Connor must stand up and take responsibility for his failure to recommend such adjustments as are required to ensure that the process functions.

One might be charitable if it were the case that Mr O’Connor was not aware of the failures in the system. In his statement releasing the third-quarter figures, however, he admits that using figures from the UK there should be 6,000 clients of the ISI in a year, not the 311 whose arrangements have been approved. Indeed, to give him and the ISI the very best spin on the numbers, only 1,152 applications for various forms of relief have even been made, the main difference between the two being those who were unsuccessful, but which also include those whose applications have not yet been considered.

To sum up on this point: inquiries are running at the rate of only one-sixth of those anticipated, the nuclear option of bankruptcy being almost as popular as the other three reliefs introduced in the Act. Less than one-third of applicants have got arrangements over the line.

Yet Mr O’Connor puts the paucity of applications down to a lack of awareness of the process and is undertaking an advertising campaign selling the ISI and the processes available, including a number of sales gimmicks like dropping ISI fees as part of this.

Of course this is nonsense, and is insulting to the tens of thousands of people around the country dealing with problem debt day to day. I receive queries in my practice every day from those needing a workmanlike insolvency process, where the outcome is foreseeable and the process is transparent, neither of which is the case here. The reality is that those affected by intractable debt fully understand the limits of the processes run by Mr O’Connor and the ISI.

The statistics set out above strongly suggest that the ISI is already unfit for purpose.

Mr O’Connor’s failure to identify the flaws in the system begs the question: is anyone in Government making proposals to amend this as Mr Shatter promised if the process didn’t function? If so what are the suggested amendments? I for one suspect they are not, and we are simply wasting money on the ISI. I hope I am wrong. Barry Lyons is a partner in Lyons Kenny Solicitors specialising in insolvency and corporate restructuring.