Total overhaul of our 'draconian' bankruptcy laws is long overdue
Compared to insolvency laws in the UK, Ireland is in the 'Dark Ages' when it comes to dealing with financial delinquents
The recent bankruptcy of Sean FitzPatrick has focussed attention on Ireland's bankruptcy laws, with one insolvency practitioner describing the 12-year disqualification period as "draconian".
With hundreds, possibly thousands, more people facing the prospect of bankruptcy, changes in the law are urgently needed.
There was very little sympathy for Sean FitzPatrick when he filed for bankruptcy on July 12 last. The former Anglo Irish chief executive and chairman had become a poster-boy for the excesses of the Celtic Tiger years.
With the state set to pump in more than €22bn of fresh capital into Anglo and NAMA planning to pay up to €20bn for some of its bad loans, it was, for most people a case of Seanie getting what he deserved.
While FitzPatrick's bankruptcy may have generated a certain grim satisfaction among a public that will be paying for his irresponsibility for a generation or more to come, the whole affair raised far more fundamental questions.
As a bankrupt, not alone will all of FitzPatrick's assets, including his share in the family home, be sold and the proceeds distributed to his creditors, he is also subject to a series of severe legal restrictions for up to 12 years.
These include not being able to serve as a director or a manager of a company. He also may not borrow more than €650 from a bank or building society without disclosing the fact that he is a bankrupt.
Just for good measure, in the admittedly unlikely event that he could persuade enough people to vote for him, as an undischarged bankrupt FitzPatrick is also barred from being either a TD or senator.
"Twelve years is out of the Dark Ages. It is not even out of the last century but the previous century. It is very draconian," says insolvency expert Tom Kavanagh, who has been involved in several recent high-profile insolvencies including Fleming Construction Group and Belgard Motors. "If you are 50 years of age and you are banned for 12 years, your career is over. It's a life sentence."
One consequence of the extraordinarily severe sanctions imposed on bankrupts is that there are only a tiny number of personal bankruptcies in this country every year -- there were 17 in 2009. FitzPatrick's case was very much the exception rather than the rule.
That may be about to change.
"The difference between the current downturn and previous recessions is the level of personal debt. It's mind-blowing," says Kavanagh.
Further complicating matters is that a very large proportion of the loans advanced during the Celtic Tiger years came with strings attached. When the bank was providing the money for that site that could only increase in value or that dream apartment in Marbella, no one paid any attention to the personal guarantees that the banks often demanded in return.
They are now. As the current case of three Limerick solicitors being sued for €21m each by Anglo Irish demonstrates, personal guarantees have a nasty habit of coming back to bite you when things go wrong.
"Everyone wants to go out and hang the big names. But you have got lots of guys who owe €500,000 or €1m. Is it fair that they are bankrupted for 12 years," asks Kavanagh?
While all of the attention has been on the financial travails of the big-name developers, there are many, many more smaller debtors, local shopkeepers, small businesspeople, doctors or dentists who joined property syndicates which bought sites that are now worthless, and who now owe sums that they can't possibly hope to ever repay. Is it fair or even sensible that all of these people are bankrupted and then restricted for up to 12 years?
Kavanagh thinks not.
"People have constitutional rights [to earn a living]. They have a right to sort out their affairs."
And things are almost certainly going to get worse before they get better.
"Anybody who is 'lucky' enough to get a credit facility from their bank is being asked for personal guarantees. Personal guarantees are being rolled out left, right and centre," says ISME chief executive Mark Fielding.
If the recession continues and more businesses fail, then many of those businesspeople who were forced to give personal guarantees in return for business loans or overdrafts will find themselves facing the prospect of personal bankruptcy.
They do things very differently in the UK. Instead of being restricted for 12 years, anyone declared bankrupt across the water is restricted for just 12 months. In addition to bankruptcy, anyone in the UK who is having trouble repaying their debts can reach an individual voluntary arrangement with their creditors.
An IVA is a legally-binding agreement between the debtor and his or her creditors under which the debtor agrees to repay a proportion of what they owe within an agreed period, usually about five years. The IVA route has enormous advantages for debtors with none of the legal restrictions that apply to bankrupts kicking in. An IVA also usually protects the family home.
For creditors an IVA dramatically reduces legal and debt collection costs, thus increasing the proportion of the debt that they can expect to recover. In order for an IVA to be approved 75pc of creditors must vote in favour. IVAs are particularly useful where someone has run up large personal debts such as unpaid credit card bills, overdrafts and personal loans.
Last year there were 49,000 IVAs and 77,000 bankruptcies in the UK.
Regardless of which route one opts for, bankruptcy or IVA, someone in the UK who restructures their debts can expect to exit the process within 15 or 18 months.
Under the Irish insolvency law the closest thing to an IVA is what is known as a "scheme of arrangement" under which the person who owes the money becomes an "arranging debtor" and reaches a deal with his or her creditors to repay some or all of the money owed. A scheme of arrangement, which allows the debtor to avoid being declared bankrupt, must be approved by 60pc of creditors both by number and value.
FitzPatrick attempted to put together a scheme of arrangement but was forced to file for bankruptcy when Anglo, which was owed €110m of his total debts of €150m, refused to agree.
Even before the FitzPatrick case, there had been calls for a reduction in the 12-year disqualification period imposed on undischarged bankrupts. In May the Law Reform Commission published a set of proposals for the reform of the law governing personal debt.
Among the recommendations was that the 12-year bankruptcy disqualification period be reduced to six years.
Kavanagh doesn't think that cutting the disqualification period to six years goes far enough. He reckons that three years would be about right. "There has to be a way of working it out. A beginning, a middle and an end. It's bit like divorce, things go wrong."
Even halving the current disqualification period would still leave a huge gap between Ireland and the UK.
Already there have been reports of several Irish property developers quietly relocating to the UK in order to protect themselves from the possible consequences of being declared bankrupt in Ireland.
"People will flock to the UK if the law isn't changed," says Kavanagh.