High Court: Insolvency deal denied after PIP failed to properly verify debtor’s income

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The High Court dismissed an appeal for a personal insolvency agreement (PIA) after it was found that the debtor’s income had not been “assessed and verified by the PIP in such a way as to give confidence as to its accuracy “.

The court ruled that the PIA left “no room for error” and that it was therefore crucial to have a clear assessment of the debtor’s income.

Opposing the request, the Personal Insolvency Practitioner (PIP) disputed the issue raised by the opposing bank, saying the bank never challenged the PIA figures during the consultation process.

Background

The debtor was 59 years old, lived in Sligo and worked as a billboarder. His house had a market value of € 85,000 but he had a mortgage balance of € 159,000 owed to the bank. As such, there was a deficit of € 74,000.

The debtor’s monthly income was estimated at € 1,861, of which € 100 was provided by his family each month. It has been proposed to reduce the mortgage debt to € 85,000, the remainder being written off. The term of the mortgage would be extended to 15 years and € 518 was payable monthly. The debtor would only end up with a surplus of € 2 per month, meaning he would be living on the ‘reasonable living expenses’ recognized by the Insolvency Service of Ireland for years. Finally, a lump sum of € 10,000 was offered by the debtor’s family.

In the usual way, the Personal Insolvency Practitioner (PIP) consulted with creditors. The main creditor was the bank. At the Circuit Court hearing for the application of Article 115A (9), the bank challenged the viability of the debtor’s income assessed by the PIP. The debtor’s payment history has been severely criticized, with the debtor not paying the mortgage between 2015 and 2017.

Several affidavits were subsequently exchanged. PIP argued that the bank had not raised the issues prior to PIA’s proposal. The bank argued that the PIP failed to provide satisfactory evidence of the debtor’s self-employment income. In response, the PIP said it had assessed the debtor’s accounts and verified income levels, but did not provide specific actions taken.

The case was adjourned to the Circuit Court because the judge was not satisfied with the assessment of the debtor’s income. The PIP had yet another opportunity to clarify matters. The debtor then produced a “certificate of income” from his accountant, which caused serious confusion.

The certificate was for the debtor’s accounts for 2018 and included term loans to the bank that had previously been settled in 2015. The bank noted that there was no satisfactory explanation for why the loans were on the balance sheet. . It took several affidavits to clarify that the loan terms were no longer relevant despite their appearance in the 2018 accounts.

In all the circumstances, the Circuit Court refused to grant the request and the PIP appealed to the High Court. The bank argued that the fundamental question was whether the court was satisfied that the debtor’s income had been verified by the PIP prior to the PIA proposal. PIP reiterated its position that the bank should have raised the issue prior to PIA’s request, noting that there was no specific reference to the assessment of income in the grounds for opposition.

The PIP also argued that the bank’s issues with income valuation revolved around the issue of the sustainability of the PIA rather than the required standards of proof.

Supreme Court

Judge Mark Sanfey began by stating that it was the responsibility of a PIP to verify all of the information contained in the proposal. The court said: “This information is the basis on which creditors will decide whether or not to vote for or against a proposed arrangement, and the PIP has a heavy burden of ensuring that the information presented to creditors is accurate.”

The court noted that the debtor’s business income was raised during the Circuit Court hearing and said it was “confusing that it is up to the debtor to deal with questions regarding his income” as the plaintiff was the PIP, not the debtor.

The debtor’s evidence ended up confusing and the court wondered how the PIP “could allow accounts to be presented by the debtor which contained errors which, if not contradicted or not corrected, would not would only tarnish its application and which, in any event, undermined the quality of the PIP. Case”.

The court noted that the trading income in the 2018 accounts showed a monthly income of € 1,327, which is € 434 less than the equivalent figure in the PIA. However, the debtor also submitted his 2019 tax return, which showed a monthly income of € 1,728, which is € 72 less than the PIA.

The court also considered In Re Ciprian Varvari, a debtor [2020] IEHC 23, where Judge Denis McDonald sharply criticized a PIP for overestimating a debtor’s income and denied a claim with costs. The court distinguished Varvari only on the basis that the debtor’s income was substantially overestimated, whereas in this case the debtor’s income was “completely unclear”.

Examining PIP’s claim that it had assessed all the accounts needed, the court said that the PIP had not provided any evidence or details of the accounts assessed. Given the “infirmities” of the accounts provided by the debtor (either in the 2018 accounts or in the 2019 declaration), the court considered that the Circuit Court was right to reject the request.

The court ruled that there was no evidence that the PIP correctly assessed the debtor’s income. None of the documents submitted to the court corroborated the income figure in the PIA. The court said that if the income figure could not be relied on, then it could not approve the PIA.

Conclusion

The court dismissed the appeal. It was noted that the bank’s conduct prior to the hearing was “questionable” as it was admitted that it did not request documents to verify the debtor’s income.

The court also noted that the concept paper agreed to by the lawyer was vague, which created confusion as to whether the income verification was challenged in court. It was said that in the future it would be “seriously considered” to deny permission to raise an argument that was not contained in a concept paper.


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