Upper debt limit of €3m in new insolvency law too high, says European Commission

THE GOVERNMENT has been warned about a potential “moral hazard” in the planned personal insolvency legislation. It will allow debtors to emerge from bankruptcy after three years instead of 12.

A European Commission report is concerned that a €3 million upper limit of debt is too high for a scheme that aims to help homeowners in financial distress struggling to repay residential mortgages.

“This cap appears to be very high considering the average size of secured household debt in Ireland and the legislation’s purpose of offering a viable alternative to bankruptcy to the most vulnerable debtors,” the report states.

Specific proposals to strengthen the Personal Insolvency Bill are contained in the draft Commission staff report, which was compiled following the recent seventh review of the EU-IMF programme.

“Additional safeguards against moral hazard under a PIA [personal insolvency arrangement] could also be introduced, including . . . lowering the cap on eligible debt.”

The report also has concerns about a “legal gap” that could prevent banks from repossessing collateral related to some mortgage loans, which the authors say should be urgently addressed.

Repossession should remain a measure of last resort, the report states.

However, it adds that maintaining balanced incentives between mortgage borrowers and creditors “may require that the existing legislative lacuna, which hinders repossession of collateral in case of default, be removed”.

The report points out that the planned law does not provide detail on a method by which to assess market value or the licensing and appointment of insolvency practitioners, “including with a view to regulate potential conflicts of interest”.

The Bill was introduced in the Oireachtas in late June and will continue its progress through the Houses next month.

It will introduce three voluntary debt-settlement systems outside formal court insolvency.

The proposed legislation is described in the report as “especially important” given the extent of private-sector debt overhang in Ireland.

The report says the Bill aims to strike an appropriate balance “between facilitating the resolution and/or restructuring of unsustainable household debts on the one hand, and upholding payment discipline and safeguarding creditors’ rights on the other”.

The Government has admitted, in documents submitted recently to the IMF and EU authorities, that the personal insolvency service expected this autumn will not be operational until next January at the earliest.

Letters and memos from Minister for Finance Michael Noonan and Central Bank governor Patrick Honohan, published last Friday, highlighted outstanding issues that have held back the proposed legislation.

These include the licensing and supervision of personal insolvency practitioners and the evolution of “reasonable” household expenses and business expenses guidelines for debtors.

The guidelines are expected to be compiled by the end of the year.

The European Commission report said earlier concerns about the protection of creditors’ rights had been addressed through strengthened appeal provisions and the greater involvement of courts in the certification of insolvency procedures.

It said resources must be made available to the courts to meet the demand that is expected as a result of the Bill, “especially in the early stages of the new regime when the bulk of requests could be anticipated”.