EN ECB-PUBLIC 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 14 September 2012  
on measures relating to personal insolvency 
(CON/2012/70) 
 
Introduction and legal basis 
On 25 July 2012, the European Central Bank (ECB) received a request from the Irish Minister for 
Finance for an opinion on the Personal Insolvency  Bill 2012 (hereinafter the ‘draft law’). 
The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Union and the sixth indent  of Article 2(1) of Council Decision 98/415/EC of 
29 June 1998 on the consultation of the European Ce ntral Bank by national authorities regarding draft 
legislative provisions1, as the draft law relates to rules applicable  to financial institutions insofar as they 
materially influence the stability of financial ins titutions and markets. In accordance with the first 
sentence of Article 17.5 of the Rules of Procedure of  the European Central Bank, the Governing Council 
has adopted this opinion. 
 1. Purpose of the draft law  
1.1 The draft law introduces wide-ranging measures which seek to deal with the issue of personal debt 
and to modernise Irish bankruptcy law. The draft law provides alternatives to court-administered 
bankruptcy proceedings for insolvent debtors (individuals) by introducing three new debt 
settlement processes to le ssen the difficulties insolvent debtor s face in discharging their debts 
whilst enabling creditors to recover debts owed them  by insolvent debtors to the extent that the 
means of such debtors reasonably permit. The new processes, while being under the jurisdiction of 
the Irish Courts, are predominantly non-judicial  based processes. Briefly, these debt settlement 
processes are: (a) Debt Relief Notices (DRNs)
2, which apply to unsecured debts of up to 
EUR 20 000; (b) Debt Settlement Arrangements (DSAs)3, which apply to unsecured debt greater 
than EUR 20 000; (c) Personal Insolvency Arrangements (PIAs)4, which apply to both unsecured 
debt (of any amount) and secured debt  of up to EUR 3 000 000 (hereinafter collectively referred to 
as the ‘insolvency arrangements’).  
                                                      
1  OJ L 189, 3.7.1998, p. 42.   
2  Part 3, Chapter 1 of the draft law. 
3  Part 3, Chapter 3 of the draft law. 
4  Part 3, Chapter 4 of the draft law.  
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2 1.2 To oversee the insolvency arrangements and to pr ovide the necessary infrastructure, the draft law 
establishes the Insolvency Service of Ireland5. The Insolvency Service is a new State-funded, 
independent corporate body responsible for perfo rming the functions under the draft law for the 
operation of the insolvency arrangements. 
1.3 Applications for insolvency arrangements are made  to the Insolvency Service. To qualify, the 
debtor must be insolvent with no likelihood of becoming solvent within five years and must meet 
certain other specified criteria depending on the type of insolvency arrangement sought6. The DRN 
lasts three years and the DSA and PIA can last up to five and six years respectively, during which time the debtor will be protected from creditors’ cl aims provided the debtor meets the terms of the 
insolvency arrangement. At the end of the applicable  period, as prescribed by statute, the debtor is 
discharged from the debts specified in the insolv ency arrangement. Insolvent debtors may make a 
proposal to enter into a DSA or PIA with their creditors via a personal insolvency practitioner who 
is authorised by the Insolvency Service and makes the proposal on behalf of the debtor
7. Before 
entering into effect, the proposed DSA or PIA must  be agreed by the prescribed supermajority of 
creditors8.  
1.4 As regards reforming bankruptcy law and procedure, the draft law9 provides, amongst other 
amendments, for a reduction of the automatic  discharge period from bankruptcy under the 
Bankruptcy Act 1988 from 12 to 3 years. Combining these reforms with the introduction of the insolvency arrangements, the draft law aims al so to mitigate the negative impact of personal 
insolvency on economic activity in Ireland. 
1.5 The publication of the draft law was a financial sector reform foreseen under the EU-IMF Financial 
Support Programme for Ireland
10. 
 2. General observations 2.1 The ECB generally supports the reform of persona l insolvency and bankruptcy laws in Ireland as 
proposed by the draft law. 
2.2 The ECB notes that the EU-IMF Financial Suppor t Programme for Ireland requires the introduction 
of the draft law
11. The ECB supports the draft law’s aim of lowering the cost and increasing the 
speed and efficiency of personal insolvency pro ceedings while at the same time mitigating moral 
                                                      
5   Part 2 of the draft law. 
6  Section 23 for DRNs, Section 52 for DSAs a nd Section 87 for PIAs of the draft law.  
7   Section 50 for DSAs and Section 85 for PIAs of the draft law. 
8   Section 67(8) for DSAs and Secti on 105 for PIAs of the draft law. 
9   Part 4 of the draft law; especially  Section 143 amending section 85(1)(autom atic discharge from bankruptcy) of the 
Bankruptcy Act 1988.     
10  Ireland: Letter of Intent, Memorandum of Economic an d Financial Policies, and Technical Memorandum of 
Understanding of 30 May 2012 in the context of th e EU-IMF Financial Support Programme for Ireland.  
11  Ireland: Letter of Intent, Memorandum of Economic an d Financial Policies, and Technical Memorandum of 
Understanding of 10 February 2012 in the context of the EU -IMF Financial Support Programme  for Ireland, structural 
reforms, p. 12.  
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3 hazard and maintaining credit discipline. The draft law provides for debt relief in appropriate cases. 
It contains provisions which aim to protect the in terests of creditors by applying strict eligibility 
criteria to the availability of the insolvency  arrangements, providing for oversight by the 
Insolvency Service and the Courts12 and requiring creditor approval by supermajority of the 
insolvency arrangement in appropriate cases. The ECB considers that the provisions strike a reasonable balance between the interests of cred itors and debtors in coming to an insolvency 
arrangement. 
2.3 The ECB notes, however, that the reforms are unpr ecedented, particularly as regards the scope of 
the PIA, which is the only insolvency arrangeme nt applying to both unsecured and secured debt 
and hence risks impacting credit institutions that have lent to the debtor against security, e.g. 
mortgage loans in arrears. In addition, the refo rms are being introduced without the benefit of a 
thorough economic impact assessment
13. The ECB considers that the insolvency arrangements and 
the supportive administrative infrastructure, wh ilst ambitiously conceived, should above all be 
workable and that these measures should not resu lt in blanket mortgage debt forgiveness and 
should be geared to minimising the risk of abuse.  In the absence of an im pact assessment, however, 
it is difficult to be confident that the objectives set by the draft law will be achieved14. In particular 
certain features of the proposed PIA regime may have negative implications for credit institutions 
in their capacity as creditors and even for the wide r functioning of the financial system. In that 
regard, the ECB invites the authoriti es to consider the following points. 
 3. Eligibility criteria for the PIA 3.1 Threshold of debt  
The ECB notes that the PIA will apply to an arrangement which, inter alia , has satisfied the 
criterion that the aggregate of a debtor’s debts which are secured debts is less than 
EUR 3 000 000
15. In the ECB’s view, the potential inclusi on of such large amounts of secured debt 
in the PIA, including debt relating to a debtor’s  quasi-commercial transactions, i.e. ‘buy-to-let’ 
mortgage loans, is unprecedented and may have significant financial implications for creditor 
banks if it results in deteriorating payment morale  of debtors. The ECB notes that the threshold of 
EUR 3 million represents by many times the average amount of secured borrowings by customers of Irish banks. If made use of by large numbers of debtors, the PIAs could significantly increase 
                                                      
12  For example, the court is responsible under the draft law for approving the issue of the protective certificate, which will 
protect the debtor under the insolvency arrangement against cr editor claims being enforced  against him during the period 
that the protective certificate is in force. Another important ro le for the courts is reviewing appeals or notices of objection  
to approved insolvency arrangements. 
13  See the explanatory memo randum to the draft law. 
14  See also Opinions CON/2012/40 and CON 2010//34. All ECB opinions are published on the ECB’s website at 
www.ecb.europa.eu.  
15  Section 87(1)(a) of the draft law.  
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4 default rates and thus impact on both the cap ital adequacy and liquidity position of credit 
institutions at a time when they are still undergoing restructuring16. 
The ECB, therefore, invites the authorities to take  into account such considerations in the draft 
provisions on the PIA and to carry out an impact assessment of these provisions on creditor banks. The authorities should also consider lowering the el igibility threshold to an aggregate of secured 
debt of no more than EUR 1 million.  
3.2 Insolvent debtor’s cooperation with creditors  
Furthermore, in order to qualify to make a proposal for the PIA, insolvent debtors must, inter alia , 
declare that they have cooperat ed for at least six months with  their secured creditors as respects 
their principal private residence
17. It is not clear to the ECB why the evidence of good cooperation 
by debtors with their creditors should only be re levant when it concerns secured debt relating to a 
debtor’s principal private residence and not to ot her debts which are owed to creditors and which 
could be more significant. The ECB considers there is  a case for debtors to be obliged to show that 
they have engaged in bona fide  debt negotiations for a reasonable period of time with a majority of 
their creditors. 
 
4. Security valuation  
The draft law provides the framework for the determ ination of the value of security in respect of 
secured debt in a PIA18. This is initially an issue to be agr eed by the insolvency practitioner and the 
creditors who are parties to the PIA. The ECB notes that the draft law contains complex provisions on the protection of secured creditors in a PIA and that the valuation of security is of central importance for the protection of their rights in that  respect. This is because the draft law precludes 
PIAs which include terms involving retention by a secured creditor of its security and a reduction 
to a specified amount of the principal sum outstanding in respect of the secured debt from specifying the amount of the reduced principal sum at  an amount less than the value of the security 
as determined in accordance with the draft law
19. The ECB considers that there should be legal 
certainty as to how such security is to  be valued for the purposes of the PIA. 
 
5. Other issues 
The ECB notes that there are a number of issues wh ich are not regulated in the draft law but which 
are crucial to its effective operation. For exam ple, the authorisation regime and compensation 
                                                      
16  For instance, the restructuring plan for Permanent TSB is currently being assessed by the European Commission. See 
Ireland: Letter of Intent, Memorandum of Economic an d Financial Policies, and Technical Memorandum of 
Understanding of 20 August 2012 in the context of the EU-IMF Financial Suppor t Programme for Ireland. 
17  Section 87(1)(g) of the draft law. Those criteria will further not apply in the circumstances set out in Section 87(3) of the 
draft law.  
18  Section 100 of the draft law. 
19  Section 98(1) and (2) and Section 100 of the draft law.  
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5 mechanism for the personal insolven cy practitioners is not specified in the draft law but will have 
to be regulated subsequently20. The ECB also reminds the authorities of their commitment to 
establish a professional financial advisory service for overburdened borrowers21. 
 
6. Review period 
The draft law currently provides for a mandatory review of the PIA regime22 after five years23 from 
the date of its commencement. The ECB believes th at for such a major reform the review period 
should be shorter. A reasonable period for reviewi ng the overall operation of the PIA regime could 
be after one to two years from the commencement of the regime. The review report could usefully 
cover such matters as the level of take up of PI As, cases of abuse and the experience of the courts 
in exercising the PIAs, e.g. related competences that have been assigned to them under the draft 
law, including dealing with  any appeals by creditors. 
 
7.  Bankruptcy law reform 
The ECB also invites the authorities to further consider reforming Irish bankruptcy law and 
procedure to make it more effective and also to  make it easier for secured creditors to repossess 
mortgaged properties upon default by the debtor24. No matter how successful the insolvency 
arrangements turn out to be, there will always be debtors who default on their specific arrangement 
and who will need to enter into  formal bankruptcy proceedings. 
 This opinion will be published on the ECB’s website.   Done at Frankfurt am Main, 14 September  2012. 
[signed] 
 
The President of the ECB 
Mario DRAGHI 
                                                      
20  Part 5 of the draft law on the regulation of personal insolvency practitioners.  
21  See Ireland: Letter of Intent, Memora ndum of Economic and Financial Poli cies, and Technical Memorandum of 
Understanding of 20 August 2012 in the context of the EU -IMF Financial Support Progra mme for Ireland; financial 
sector reforms, p. 10.  
22  Part 3, Chapter 4 of the draft law. 
23  Section 84 of the draft law . 
24  There have been only a handful of applications for bankr uptcy filed with the courts under the current bankruptcy 
legislation. See the Law Reform Commission Report on Pers onal Debt Management and Debt Enforcement of December 
2010.