Less judicial involvement should be target of new insolvency act
FIGURES from the Insolvency Journal published at the beginning of this year showed that 1,638 companies had gone into insolvency in 2011, a 16pc increase on those in 2009.
Only one per cent of those companies availed of the Examinership process. These figures appear to demonstrate that the Examinership process, because of its cost and complexity, is not suitable, except for larger organisations with a large amount of debt.
This was exactly the point I made in a submission to government over two years ago, along with my colleague Christiane Hutchinson of Catalyst Management Partners.
Our proposal was to introduce a legal framework for small and medium companies to restructure debt with their creditors with limited judicial involvement.
This would be along the lines of the UK 'Company Voluntary Arrangement' process. We have also presented this proposal to the current government.
I believe that at least some of these 1,638 companies could have been saved (with the consequent protection of employment and tax revenues) had our proposal been accepted and implemented.
We are still waiting for legislation on reform of personal insolvency law following upon the Law Reform Commission's recommendations in this area. A Personal Insolvency Bill is expected shortly, as part of the understanding with the EU, ECB, IMF "troika."
There is a suggestion that the period for bankruptcy might be reduced to three or five years -- it is currently up to 12 years -- and there is also speculation as to whether mortgage debt will be included in any non-judicial debt settlement scheme.
It seems amazing, given the financial emergency which has engulfed us all since the collapse of Lehman Brothers in September 2008 and the huge levels of personal and corporate debt, much of which can never be repaid, that there has been so little action of reform of the law on personal and corporate insolvency.
I am not aware of any other modern democracy which has personal and corporate insolvency laws as penal as those in Ireland. These are clearly now unfit for purpose in the context of the type of stress in our economy. The effect of this is to stifle growth and entrepreneurship.
The failure to deal with reform in this area contrasts sharply with the speed with which the bank guarantee scheme was implemented in September 2008, or how the legislation which established NAMA was rushed through the Oireachtas.
It can only lead to the conclusion that the plight of the ordinary business person and individual debtor is not seen as being as important as that of the banking and property sectors.
This is put even more sharply in context by the fact that the United Kingdom decided, as part of a drive to encourage enterprise, to reform the way that it dealt with personal insolvency
As has been widely publicised, this means debtors are able to get discharged from bankruptcy after twelve months and re-establish themselves in business.
Other important differences in the UK are that a bankruptcy order can be obtained in the County Court (equivalent to our Circuit Court) as opposed to the High Court. This makes the process a lot cheaper.
In addition, pensions in Ireland can be used to repay creditors in a bankruptcy, whereas they are protected in the UK.
Some might argue that the UK regime is too lenient, and that the twelve month period is too short for people to be able to walk away from their debts.
The reality, however, is that nobody wants to become bankrupt. Most people, in my experience, want to pay their debts as best as they can. Even in a short period bankruptcy, whatever assets the bankrupt has will be put under the control of a trustee and used towards discharging their debts, so it is by no means an easy option.
I am not aware of any groundswell of objection from creditors in the UK to the legal regime which exists there. In Ireland, we need to drop the Victorian attitude which exists in some quarters of punishing people who run into financial problems.
However, a more lenient regime should apply only where there is no dishonesty involved and where the bankrupt has not attempted to hide assets from his or her creditors.
When you consider that we had 17 bankruptcies in 2009, compared with 74,000 in the UK, it is clearly not an attractive option here for either debtors and creditors.
In the case of the Sean Quinn bankruptcy, I would question whether there will be any better result for the IBRC or other creditors as a result of making him bankrupt in the Republic of Ireland as opposed to Northern Ireland.
The costs here are higher, because it is a High Court process and IBRC would have incurred significant legal costs in overturning the Northern Irish order.
It is not just about bankruptcy. We also need a workable, cost-effective, non-judicial individual debt settlement procedure which can avoid bankruptcy, as recommended by the Law Reform Commission. I believe mortgage debt should be included in this.
There should also be a similar process for corporate debt. These types of structures will at least help people work through their debt.
Ireland should also drop the requirement in company law that liquidators of insolvent companies must apply to have the company directors restricted, unless relieved of that obligation by the Director of Corporate Enforcement.
A liquidator should be obliged to do that only where he or she is of the opinion that a director has not acted honestly and responsibly. The present requirements are adding to the stress and distress of honest people who have run into financial difficulties through no fault of their own.
We do have a corporate and personal debt emergency. I hope that we can treat reform of this area as an emergency in the same way as we dealt with the legislation to save the banks and establish NAMA. If we do so we can then develop a culture where we focus on turnaround and renewal as a solution, rather than insolvency and corporate banishment.
Neil Keenan is a partner with LKG Solicitors and a founder member of the Turnaround Management Association Ireland. He is currently president of the Dun Laoghaire-Rathdown Chamber of Commerce.