The High Court has ruled that a personal insolvency arrangement proposing to reduce a secured debt below the value of the property securing it cannot be imposed on a creditor without its consent, even where the property has positive equity and the creditor is offered a share of that equity.
Mr Justice Mark Sanfey delivered the ruling on a preliminary issue in an appeal by John and Sheralyn McEvoy. Their proposed arrangement concerned their principal private residence, which the parties agreed was worth €330,000. The amount owed to their sole creditor, EBS DAC, was €210,887.58, leaving agreed equity of €119,112.42.
The proposal would have reduced the mortgage principal to €31,633.14, a reduction of €179,254.44. In exchange, the debtors proposed giving EBS an 85% share of the equity through an irrevocable option to acquire a share of ownership for €1. The option could be exercised if the home was sold or after the death of the longer-surviving co-borrower. EBS did not consent to that treatment.
The debtors argued that the Personal Insolvency Acts expressly allow a debt-for-equity arrangement and that this provision should operate as an exception to the rule requiring creditor agreement to a reduction below the security’s value. EBS argued that the legislation made the debt-for-equity provision subject to that rule, so the proposal could not be imposed without consent.
The judge held that the statute allows a personal insolvency practitioner to propose a debt-for-equity solution, but the creditor’s share of equity is the exchange for reducing the debt and does not count as part of the value of the security. The statutory protection therefore prevents the principal sum from being reduced below the security’s value unless the secured creditor agrees. The court said this applies whether the equity is positive or negative.
The ruling addressed only the agreed preliminary issue: whether the proposed arrangement offended that statutory protection, irrespective of whether it would in fact grant EBS a share in the debtors’ equity. The judge answered yes. He said the court could not use the statutory review process to impose the arrangement without the creditor’s agreement, and that changing this position would require legislation.
The High Court dismissed the appeal and affirmed the Circuit Court’s order dismissing the application. The judgment did not determine the separate question of whether the proposal’s option would in fact operate to grant EBS a share in the equity.