Alan Shatter (Dublin South, Fine Gael) | Oireachtas source

I thank Deputy Donnelly both for raising this issue and for his constructive contribution throughout to this legislation. I am anxious to ensure there is no misunderstanding about Seanad amendment No. 200. I hope to avoid creating too much boredom in the Chamber but I will repeat something I stated previously and appreciate the Deputy giving me the opportunity to do so. Of course, I have not heard the presentation by Mr. Ray MacSharry to which the Deputy made reference. Let us look at what Seanad amendment No. 200 does and its implications for the legislation.

It replicates something that is already in bankruptcy law with which the Deputy will be familiar. With this legislation we are effectively describing a period of three years' bankruptcy. The only circumstances in which bankruptcy is extended, to paraphrase the legislation, is where there has been a fraud on behalf of the debtor or there has been a clear concealment of assets which may lead to the bankruptcy period being extended for up to eight years. Those are the only circumstances in which the bankruptcy period can be extended. There is no question of this section extending the bankruptcy period from three years to eight years for individuals who have not engaged in fraud and have not concealed assets. It is very important to get across that message. This is not a provision that will turn what is to be a three-year bankruptcy period into an eight-year bankruptcy period and it quite clearly does not do that.

What does the section do? The section contains a provision which allows for the official assignee in bankruptcy to seek a "bankruptcy payment order" by way of application to the court. The circumstances in which the bankruptcy payment order may be sought are where during the course of the three years of the bankruptcy period, the individual's financial circumstances might substantially improve and there may be a valid ground for arguing that post-bankruptcy it is reasonable that he or she continues to discharge some element of the outstanding debt that has not been discharged during the course of the bankruptcy.

The official assignee may be asked to pursue that issue by any creditor - it does not have to be a financial institution. Let us always remember that we are dealing with insolvency legislation. The area about which the Deputy is concerned is of course of particular personal concern to me and to the Government. However, let us start from the perspective that this is insolvency legislation. In the context of insolvency legislation where money is owed to creditors, there may be other individuals who are barely hanging on financially and who during the course of the bankruptcy have not recovered a reasonable portion of the debt that is there, but because of the improved circumstances of the bankrupt there is a fair and reasonable prospect they may get something additional. That could also apply to a financial institution.

The official assignee has discretion, first, as to whether he or she makes that application and, second, as to how much that application is for. It will be for the courts to determine how to deal with these applications and they must deal with them in circumstances in which individuals who have exited bankruptcy no longer have any of the constraints or difficulties of being a bankrupt. The person is free to get on with his or her life, to create another business and to generate income in whatever way he or she chooses. If the person is successful in that, it may be fair and reasonable for the person to discharge some additional portion of debt. There will be circumstances where that is appropriate and there clearly will be all sorts of circumstances where that is not appropriate. From the perspective of a creditor, whether secured or unsecured, a financial institution or another party, there is no guarantee of the outcome of making such an application to the courts.

The official assignee may determine it is not appropriate to make the application. Even when the official assignee makes the application, the courts may determine it is not appropriate to make the order because there is a particular philosophy about this legislation. The particular philosophy is that people are genuinely given a second chance to get on with their lives and exit from their financial difficulties. Of course people exiting bankruptcy must be given an incentive to get on financially successfully with their lives and not to find themselves put into further penury. That is all very important.

As the Deputy correctly says, this legislation is based on a certain approach. It is based on an approach in particular dealing with the personal insolvency arrangement which deals with secured credit where it is perceived there is an incentive for all creditors, including financial institutions with secured debt, to engage constructively with a personal insolvency practitioner to see if an agreement or resolution can be reached. For a range of reasons bankruptcy may be a very bad alternative, as much for the financial institution or other creditors as it is for the debtor because a debt settlement or personal insolvency arrangement may, over a period of years, create a greater possibility of recouping some of the debt due and may create greater opportunity for the debtor to exit the arrangement. From the financial institution's perspective the bankruptcy would produce an inevitable sale of the home. This may not be something the financial institution wants to achieve for a range of reasons. If it travels the route of repossession as opposed to bankruptcy there may be substantial downsides. The Deputy is aware of those and I will not delay the House by going into them.

This mechanism has been part of bankruptcy legislation in other jurisdictions for some time and it remains part of this structure. However, to suggest it creates a bankruptcy period of eight years instead of three years is incorrect. All of the constraints that come with bankruptcy are lifted from an individual. To some extent how this will work in practice in the context of the new arrangement or how it might impact on discussions and negotiations is greatly a matter for conjecture.

The personal insolvency arrangement arises in circumstances in which we have tens of thousands of people who are in significant personal financial difficulty with home mortgages. There are individuals who might have been part of two-income family households and are now part of one-income family households, individuals who may have been self-employed in businesses that were successful in the early part of the 2000s but are barely eking out a living for today, and individuals whose assets have collapsed. God help them, they might not only be in negative equity but might have invested whatever savings they had in bank shares which have completely gone down the toilet. There are many individuals in this State who, through no fault of their own, are caught in a debt trap. Some individuals are caught in that debt trap through their own irresponsibility. Not everybody is there for reasons beyond their control. However, there are thousands of people who are there for reasons beyond their control. They have been hit by a fiscal and economic tsunami. They are individuals who perceived themselves as being in secure employment and then found themselves unemployed. They are individuals who were running businesses that appeared to be successful, but who, because of the failure of others to pay debt, have found themselves in debt with other businesses, perhaps companies going into liquidation, non-corporate businesses, SMEs or single-ownership businesses that have been wound up. Many people are in trouble.

The issue is that the banks must constructively engage with this legislation. As I have said in the context of the personal insolvency arrangements, there are options for a financial institution with secured debt, be the secured debt a home loan or another form of loan. Based on the individual circumstances of the debtor concerned, arrangements will clearly need to be put in place that are either debt forbearance or involve some aspect of debt forgiveness. There is no doubt we know financial institutions will engage in debt forbearance. We know of in excess of 80,000 home loans where debt forbearance arrangements have been put in place, some of a temporary nature and some of longer duration. There are individuals who have benefited from debt forbearance arrangements and have now worked themselves out of that and are now paying full capital and interest.

The area in focus is that of debt forgiveness. Where individuals are genuinely insolvent and cannot, as opposed to will not, pay their monthly repayments, who are burdened by other debt and may be living in negative equity, to what extent will the financial institutions engage in debt forgiveness and write down?

There is no doubt that there are thousands of individuals for whom debt forbearance under the concept of the personal insolvency arrangement will not resolve the issue. It will not resolve it for either the debtors or the financial institution. There needs to be a constructive engagement by financial institutions with individuals based on their circumstances to recognise that in some instances, debt forgiveness or write off is appropriate. Deputy Donnelly and I have, for the sake of simplicity, regularly used the example of the homeowner who has borrowed €400,000 to acquire a home but whose home is today worth €200,000; is in negative equity by €200,000; his or her personal circumstances and income is depleted; and he or she can no longer make the mortgage repayments and has no other assets. It may be a married couple who are trapped in an apartment with two children - a home that was never constructed to accommodate two children.

For individuals in those circumstances where there is no reasonable prospect in the medium term of their financial position changing, debt write off is crucial for their personal circumstances and to enable them to participate again in the economy of this State and contribute to domestic economic growth. For selfish reasons, the State has an interest in these people exiting from debt. From the financial institution's perspective, it is important that where that is the position, losses are crystallised and an artificial value is not attached to the loan in the bank accounts. Financial institutions have been recapitalised to facilitate addressing this issue, not just in other areas but in the mortgage debt area. They have been stress tested and the time has come for them to recognise that there is a need to deal with this in the manner that is appropriate based on the individual circumstances of someone in serious debt and having regard to the level of that debt in the context of the structure of the personal insolvency arrangement.

As Deputies will be aware, AIB made a very helpful comment about this issue about a week or ten days ago. It made it clear that for some individuals in serious debt of this nature who engaging with it, debt forgiveness is the only route to travel. That does not mean writing off the debt in its totality but writing off a portion of the capital due to recognise the reality based on current values and where an individual stands. We know of a small number of instances where financial institutions have engaged in some level of debt forgiveness that has not been publicised. One or two cases were publicised in recent months. It is not clear what scale it has happened on because clearly the financial institutions, taking Deputy Donnelly's approach, have their own interest in trying to ensure they do not encourage people who can pay not to do so in the hope they may get capital write off. The State cannot afford for that to happen either. Public comment indicates that if there is to be capital write off, it will not happen easily. AIB in recent days have been up-front and said publicly it recognises the need to do this. There is a need to do it for the health of AIB as well in order to get this bank out from under the yoke of uncertainty with regard to the true value of the mortgages they hold.

What about Bank of Ireland and the comments made by Ray MacSharry? I did not hear what he said but I would be of the view that if any public interest director of a financial institution publicly or privately states that his or her institution will not constructively engage with this legislation and in no circumstances will anyone will be afforded the possibility of a capital write off, regardless of the financial difficulties he or she is in, that individual is not acting in the public interest, never mind the private interest of the debtor. It is untenable to publicly state this in the circumstances of this Oireachtas coming together in a united fashion to enact a piece of insolvency legislation intent on trying to assist people in debt difficulties in a constructive way while at the same time, facilitating creditors to recoup at least a portion of what is due to them in a manner that does not involve the expense and complexity of bankruptcy proceedings.

I know Deputy Donnelly would not do this deliberately so I do not want him to take offence but I hope he either mis-reported in some sense what Ray MacSharry said or that what Mr. MacSharry said was not adequately thought out in the context of the insolvency legislation going through the House this evening. Perhaps we need to remember that this is a position that those on the boards of financial institutions or chief executives have taken up pending the enactment of the legislation and that when the legislation is enacted, they will have to review their position.

Let there be no doubt about it. Regardless of whether it is Bank of Ireland, Richie Boucher or Ray MacSharry, they must ensure their institutions constructively engage under this legislation in the public interest, the interest of those caught in financial difficulties and the interest of their own institutions and credibility. Without putting a tooth in it, we all know and it is no secret that the level of indebtedness people incurred and the property bubble and collapse were dramatically and substantially contributed to by the financial institutions of this State. They failed to undertake appropriate due diligence on individuals' capacity to repay loans they acquired, failed to have any regard to the sustainability of the increase in property values, threw money like confetti at developers to purchase land at inflated prices and contributed to a significant degree to the property bubble and the difficulties many young people are in. Too many young people thought they were being responsible and purchased homes at inflated prices for fear that if they did not purchase when they did, they would never be able to own a home in this State and banks helped to fuel that. None of that solves where we are today but I will be very clear about one thing I keep repeating. If I find within a short period during the operation of this legislation that all or some of the financial institutions are intent on not engaging constructively with the personal insolvency arrangement provisions for whatever reason, I will not be slow to bring proposals to Government to amend the legislation. Let there be no doubt of any description about that. Again, I thank Deputy Donnelly for raising the issue.

I keep saying that we must be careful with this legislation. I am very conscious of its importance to people with family homes in negative equity who are in significant financial difficulty. However, it is insolvency legislation that goes beyond those circumstances and applies to the broad gamut of circumstances in which individuals can get into financial trouble and which do not all relate to family homes. The great benefit of the personal insolvency arrangement is that it affords people in financial difficulty not just the possibility over a period of years of working out of those financial difficulties but the possibility of retaining ownership and occupation of their family homes, which will not occur if they have to resort to bankruptcy.

All I can say to the Deputy is that I am very disappointed to learn of comments made today in a committee of this House. I hope the individual who made them will reflect on them. Once the legislation is enacted, I would expect the fullest co-operation from financial institutions in working carefully and sensibly and with intelligence in respect of the legislation.

However, if there are difficulties I will not be slow to amend the legislation, and it is very important this is understood outside the House. The Government has engaged with the financial institutions in the lead-in to the enactment of this legislation. Some weeks ago, because I thought it was a useful exercise to do so, I met AIB and Bank of Ireland, and what I am now saying in the House I said very clearly at that meeting. One of the attendees was Mr. Boucher. I expect he understands exactly where the Government is coming from, what our concerns are and what Bank of Ireland should do in the context of operating the legislation constructively and sensibly, engaging with personal insolvency practitioners and the circumstances of their customers and ensuring appropriate and sensible arrangements are made.

Deputy Donnelly is right, of course, and his point applies to AIB as much as others. Banks have a duty to try to recoup debt owing to them. They also have an obligation to recognise a debt which is not recoverable, and not maintain a pretence that some part of a debt which cannot be recovered is recoverable. The Bill provides the mechanism for this and I hope we do not find ourselves back here too soon having to amend it. However, I have no doubt all of us, in government and in opposition, will be watching very carefully how the legislation works in the early months of its operation.

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