Banks target defaulters' businesses
SMALL businesses and farmers are coming under renewed pressure from banks who are using new, tougher tactics to skirt changes to bankruptcy law.
The Personal Insolvency Bill 2012 reduces the length of bankruptcy from 12 years to three years, meaning people are discharged from their debts automatically after that time.
It is aimed primarily at people with unmanageable personal debts but the Irish Independent has learned that banks are circumventing the process by registering a charge against a person's business if they default on their mortgage.
The process works as follows. An SME owner has a €200,000 mortgage from Bank A on a second home that he cannot pay. The bank seizes that home and sells it off for €150,000, leaving a shortfall of €50,000.
Instead of then moving to bankrupt the person, Bank A registers a charge against the SME owner's business for the €50,000. As a charge remains on an asset for up to 10 years, there is a far greater chance of the money being paid back than if the bank puts the person into bankruptcy.
If the business is financed by a different bank, that charge then supersedes any other debts the business may have.
Therefore the SME's lender is unlikely to provide further financing, which could potentially put it out of business.
Banking sources emphasised that the tactic was completely legal.
"We have to remember that most of the banks are in state hands so they have a legal duty to get as much money back as they can," he said.
Others however claimed the change reflected the flaws in the Insolvency Bill, particularly the fact that it covered debts of up to €3m.
"Now there are stories of charges in the mid six figures being registered against SMEs and so on.
"That cripples the business because it can't get the financing it needs to stay alive unless a bank is willing to offer an unsecured loan, and that is not going to happen the way things are going now."
This is just the latest controversy to hit the SME sector, with small business trade associations and the banks at loggerheads over how much credit is being offered by the pillar banks in particular to the sector, and the terms that go with any such loans.
While the likes of Allied Irish Banks and Bank of Ireland are adamant they are "open for business", both are dramatically reducing the size of their balance sheets.
A Central Bank report last week showed demand for credit in Ireland was about the same as other European countries but the terms of any loans were among the strictest in Europe.
A spokesman for the Irish Banking Federation declined to comment.