Opinion of the European Central Bank of 14 September 2012 on measures relating to personal insolvency (CON/2012/70)
Date: 2012-09-14
Institutions: European Central Bank
Subjects: Ireland, civil bankruptcy, debt, financial solvency, financial stability, national law

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  Central  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  institutions  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  lessen  the  difficulties  insolvent  debtors  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  
2  
3  
4  

OJ L 189, 3.7.1998, p. 42.  
Part 3, Chapter 1 of the draft law. 
Part 3, Chapter 3 of the draft law. 
Part 3, Chapter 4 of the draft law. 

 
 
 
 
                                                      
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1.2  To oversee the insolvency arrangements and to provide 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  performing  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’ claims 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 insolvency 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  debtor7.  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  also  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 Ireland10. 

2. 

General observations 

2.1  The ECB generally supports the reform of personal insolvency and bankruptcy laws in Ireland as 

proposed by the draft law. 

2.2  The ECB notes that the EU-IMF Financial Support Programme for Ireland requires the introduction 
of  the  draft  law11.  The  ECB  supports  the  draft  law’s  aim  of  lowering  the  cost and  increasing  the 

speed and efficiency of personal insolvency proceedings while at the same time mitigating moral 

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6  
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8   
9   

10  

11  

Part 2 of the draft law. 
Section 23 for DRNs, Section 52 for DSAs and Section 87 for PIAs of the draft law. 
Section 50 for DSAs and Section 85 for PIAs of the draft law. 
Section 67(8) for DSAs and Section 105 for PIAs of the draft law. 
Part  4  of  the  draft  law;  especially  Section  143  amending  section  85(1)(automatic  discharge  from  bankruptcy)  of  the 
Bankruptcy Act 1988.    
Ireland:  Letter  of  Intent,  Memorandum  of  Economic  and  Financial  Policies,  and  Technical  Memorandum  of 
Understanding of 30 May 2012 in the context of the EU-IMF Financial Support Programme for Ireland. 
Ireland:  Letter  of  Intent,  Memorandum  of  Economic  and  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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hazard and maintaining credit discipline. The draft law provides for debt relief in appropriate cases. 

It  contains  provisions  which  aim  to  protect  the  interests  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  creditors  and  debtors  in  coming  to  an  insolvency 

arrangement. 

2.3  The ECB notes, however, that the reforms are unprecedented, particularly as regards the scope of 

the  PIA,  which  is  the  only  insolvency  arrangement  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  reforms  are  being  introduced  without  the  benefit  of  a 
thorough economic impact assessment13. The ECB considers that the insolvency arrangements and 

the  supportive  administrative  infrastructure,  whilst  ambitiously  conceived,  should  above  all  be 

workable  and  that  these  measures  should  not  result  in  blanket  mortgage  debt  forgiveness  and 

should be geared to minimising the risk of abuse. In the absence of an impact 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  wider  functioning  of  the  financial  system.  In  that 

regard, the ECB invites the authorities 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 00015. In the ECB’s view, the potential inclusion 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  

13  
14  

15  

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 creditor claims being enforced against him during the period 
that the protective certificate is in force. Another important role for the courts is reviewing appeals or notices of objection 
to approved insolvency arrangements. 
See the explanatory memorandum to the draft law. 
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.  
Section 87(1)(a) of the draft law. 

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default  rates  and  thus  impact  on  both  the  capital  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  eligibility  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  cooperated  for  at  least  six  months  with  their  secured  creditors  as  respects 
their principal private residence17. It is not clear to the ECB why the evidence of good cooperation 

by debtors with their creditors should only be relevant when it concerns secured debt relating to a 

debtor’s principal private residence and not to other 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 determination of the value of security in respect of 
secured debt in a PIA18. This is initially an issue to be agreed 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  law19.  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 which are not regulated in the draft law but which 

are  crucial  to  its  effective  operation.  For  example,  the  authorisation  regime  and  compensation 

16  

17  

18  
19  

For  instance,  the  restructuring  plan  for  Permanent  TSB  is  currently  being  assessed  by  the  European  Commission.  See 
Ireland:  Letter  of  Intent,  Memorandum  of  Economic  and  Financial  Policies,  and  Technical  Memorandum  of 
Understanding of 20 August 2012 in the context of the EU-IMF Financial Support Programme for Ireland. 
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. 
Section 100 of the draft law. 
Section 98(1) and (2) and Section 100 of the draft law. 

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mechanism for the personal insolvency 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 that for such a major reform the review period 

should be shorter. A reasonable period for reviewing 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 PIAs, 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  
21  

22  
23  
24  

Part 5 of the draft law on the regulation of personal insolvency practitioners. 
See  Ireland:  Letter  of  Intent,  Memorandum  of  Economic  and  Financial  Policies,  and  Technical  Memorandum  of 
Understanding  of  20  August  2012  in  the  context  of  the  EU-IMF  Financial  Support  Programme  for  Ireland;  financial 
sector reforms, p. 10. 
Part 3, Chapter 4 of the draft law. 
Section 84 of the draft law. 
There  have  been  only  a  handful  of  applications  for  bankruptcy  filed  with  the  courts  under  the  current  bankruptcy 
legislation. See the Law Reform Commission Report on Personal Debt Management and Debt Enforcement of December 
2010. 

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