Turning the tide of debtors heading to UK
THE Government's recent announcement that the promised reforms of the Irish bankruptcy regime will be delayed by a further two months has exasperated many borrowers who are facing financial difficulty.
More and more distressed borrowers are increasingly looking to the UK for a more immediate solution.
It appears that it may now be another year before the promised Irish legislation is actually operational in this country. While the law might be passed into legislation by later this year, the Government will then have to set about establishing the new Insolvency Service, and to establish a licensing system for the new personal insolvency trustees.
No detailed guidance has yet been given on what the minimum expected requirements will be for such trustees in terms of competence, professional indemnity insurance, their own solvency etc.
In advising a debtor, or creditor, it is necessary for the professional adviser to navigate very complex interfaces between the Bankruptcy Acts 1988 to 2011 and the Companies Acts, income tax, stamp duty, capital gains tax, capital acquisitions tax and at least 15 other pieces of other key legislation.
Some of these interfaces are contradictory, particularly with legislation passed since 1988, and no judicial interpretation has yet been given as to how these contradictions should be treated.
Another major issue is that there is a lack of practical experience in the Irish marketplace in dealing with the complexity and number of bankruptcies. As recently as 2008, there were only eight annual personal bankruptcies.
The lack of practical experience in the marketplace is leading to creditors, in some cases, placing an over reliance on solicitors, who tend to take a pure legal approach and whose focus is on judgment.
It is very frustrating to see some creditors turn down very good settlement deals because they and their solicitors simply don't understand the complexities of the various interfaces.
The lack of practical experience is also leading to some professional advisers offering simplistic one-dimensional advice which is not in the best interests of the debtor or the creditor.
The advantages of debtors moving to the UK and utilising the bankruptcy procedure in the UK are obvious.
Firstly, the UK has a tried and tested system of individual voluntary arrangements (IVAs) which allow debtors to do deals with their creditors on a low-cost basis.
The UK does approximately 50,000 IVAs every year. If the IVA is not successful, then the debtor is placed into bankruptcy, but at least he is discharged after a bankruptcy period of just 12 month, which compares favourably with the proposed three-year discharge period in Ireland.
One of the key planks of the new proposed Irish bankruptcy regime is a personal insolvency arrangement (PIA) which is effectively modelled on Britain's IVA system.
The reason why IVAs are so successful is that creditors receive more money back than they do under a bankruptcy. Similarly, it is expected that under a PIA creditors would receive more money back than under bankruptcy.
While the Irish PIA will be closely modelled on the IVA system, there will still be substantial differences between the actual bankruptcy regimes of each country.
In the UK, when a debtor is declared bankrupt, the official receiver is initially appointed.
The official receiver is a government official whose costs are effectively financed by a levy on all realisations in a bankruptcy.
In practice, if the bankrupt estate has realisable assets, the official receiver will hand it over to a private sector insolvency practitioner who will charge fees on a time cost basis.
In Ireland, the official assignee, also a government official, is initially appointed and he tends to complete the bankruptcy. The official assignee does not charge fees himself, but court duty is levied on asset realisations.
A major difference between the Irish bankruptcy regime and the UK regime is the involvement of the court system. In Ireland there is a constant interface with the court system which is costly in terms of solicitor and counsel fees.
There are other arguments as well, but they all point to the conclusion that the best solution for debtors, and creditors, is for the Government to expedite the new legislation which would allow low-cost PIAs to be introduced.
Jim Stafford is a partner with Friel Stafford, a firm of corporate recovery specialists. He is a guest speaker on personal insolvency at the annual conference of Chartered Accountants Ireland today.