Many Irish mortgage holders are in long-term arrears. It has been well reported too, that coming to an arrangement with the lender can seem like an impossible task. Often, the debt is sold by the bank to investment fund companies who purchase the debt as part of a portfolio of loans. This brings its own complications. However, a recent case before the High Court has brought about a certain amount of reform in this area.
The High Court judgement held that alleged unfair prejudice to an investment fund creditor under a proposed Personal Insolvency Arrangement should be assessed in light of likely investment returns and not the cost of its future capital needs.
In the case before the court, Mitchell O’Brien, Personal Insolvency Practitioner (PIP) had formulated a Personal Insolvency Arrangement (PIA) on behalf of a married couple. The principal debt was a mortgage over their family home. This had been purchased by an investment fund company, Shoreline, as part of a portfolio of mortgage loans. With respect to the mortgage debt, the PIA proposed:
- a write-down of the loan balance from €323,626 to €190,000 (the value of the property)
- interest-only payments during the 6 years of the PIA
- extension of the remaining mortgage term from approximately 18 years to 27 years
- interest rate to be fixed at 3.65% for the entire remaining 27 year term
The PIA had been rejected by Shoreline at the creditors’ statutory meeting on the grounds that the proposals relating to the mortgage debt were unsustainable on a long-term basis. Shoreline argued that the proposal to fix the interest rate for 27 years was completely unheard of in banking practice and unfairly prejudicial to that creditor. The Circuit Court upheld the creditor objection. The debtors appealed to the High Court.
The High Court Judge was satisfied that Mitchell O’Brien’s proposal was sustainable and overruled the Circuit Court decision. The mortgage debt would not be refinanced but restructured. Therefore, the test for the court in considering the reasonableness of a long-term interest rate was not always to test the rate against the projected future borrowing needs of a mortgage lender. The fairness of the rate should be tested in the light of the actual circumstances of the objecting creditor.
The Judge also said that the question of fairness should not be tested on a wholly mathematical basis. Considerations of the PIA should be whether it created a reasonable prospect that a debtor could continue to remain in their own home. Another consideration should be whether it enabled a debtor to resolve their indebtedness without recourse to bankruptcy while enabling creditors to recover debt to the extent that the means of the debtor reasonably permitted.
This case demonstrated that a proposed PIA could not be deemed unfairly prejudicial merely because the likely return on bankruptcy could be marginally better. Irish Courts are willing to sanction PIAs which provide for fundamental and long-term changes to a mortgage contract especially where this will help the debtor to remain in their home. From our work here at John A Sinnott Solicitors, this seems a very sensible approach by the PIP and a solid decision by the Courts, entirely in keeping with the intended thrust of insolvency legislation and giving people a fresh start. We believe that this ruling will help transform how banks and funds deal with situations of debt and long-term arrears.