New law required to allow positive 'debt for equity' swaps in personal insolvency
High court reporters
The law would have to be changed if financial institutions and other creditors are to be required to accept positive "debt for equity" swaps in personal insolvency arrangements, a High Court judge said.
Mr Justice Mark Sanfey made the comment when he dismissed an appeal in which a couple sought to write down a €210,000 balance on their mortgage to €31,000 by giving their mortgage provider an 85 per cent stake in their family home.
However, as the law requires the creditor’s consent for this - and it was not forthcoming - the judge said he had to dismiss the couple's appeal.
The case concerned a couple who sought a personal insolvency arrangement to resolve the debt over their €330,000 family home to their mortgage lender, EBS, on which there was an outstanding debt of some €210,000, but in which there remained a "positive equity" of some €119,000.
Central to the resolution of the debt was that the mortgage loan balance would be reduced from €210,887.58 to €31,633.14 on the coming into effect of their personal insolvency arrangement.
Loan balance
This would represent an 85 per cent reduction in the loan balance and in exchange EBS would be granted an 85 per cent share in their home. EBS could acquire that 85 per cent in the event of the sale of the home or, on the death of the longer surviving co-borrower, from the estate.
After the EBS would not agree to their proposals, the couple's personal insolvency practitioner applied to the Circuit Court to have the arrangement approved. That court refused to do so under Section 103(2) of the Personal Insolvency Act 2012 because the permission of the secured creditor (EBS) was required.
The couple appealed to the High Court.
It was argued on their behalf that because this was a debt-for-equity case involving positive equity that a previous ruling in a debt-for-equity case did not apply. It was argued that there was a widely held view that a definitive ruling was required as to whether debt for equity solutions involving positive equity were in principle lawful or not.
EBS opposed the appeal and said the court should deal with the matter in accordance with a previous case and in accordance with the 2012 Act.
Mr Justice Sanfey, ruling on the positive equity question as a preliminary issue, said it does not matter whether the equity being offered by is positive or negative. The relevant parts of the Act "are not in any way obscure or ambiguous", he said.
Where one can identify circumstances in which a debt for equity swap involving positive equity might make good commercial sense from the point of view of the secured creditor, that creditor can readily agree to the proposal, he said.
However, he said, the Act simply states that "in the absence of an agreement, this particular solution cannot be imposed by the court on the creditor".
If this state of affairs is to change, in the judge's view "amending legislation will be required".
