A recent ruling of Tullamore Circuit Court in the context of a Personal Insolvency Arrangement is requiring Pepper Finance to apply a fixed interest rate to a mortgage.

Fixed interest mortgages are not a product Pepper Finance, or many similar credit servicing firms, provide. What impact could this judgment have in a climate of ever-increasing interest rates and a cost of living crisis?

What is a Personal Insolvency Arrangement?

A Personal Insolvency Arrangement (PIA) is one of 3 debt resolution mechanisms introduced by the Personal Insolvency Act 2012 where people cannot afford to pay their personal debts. The PIA is designed to deal with secured debts of up to €3,000,000 (which can be increased in certain circumstances) and necessitates the appointment of a Personal Insolvency Practitioner who liaises with the lenders on behalf of the debtors with the aim of reaching a settlement and/or agreed restructuring of the debts. This involves the calling of a creditor’s meeting at which the PIA will either be approved by or rejected by the creditors.

Background

A couple applied for a PIA as they were struggling to meet their mortgage repayments which had an interest rate of 5.5% APR. The grounds to object to a PIA are prescriptive and it would appear (no written judgment of the recent decision has been published) that Pepper Finance relied on the ground that the PIA – which involved a revised repayment plan with a 2.5% interest rate over 25 years – would unfairly prejudice their interests. The Personal Insolvency Practitioner applied to the Circuit Court to have this rejection reviewed.

Circuit Court Ruling

The Circuit Court enjoys jurisdiction under the Personal Insolvency Act 2012 to either uphold a rejection by a creditor or in effect overrule the objection by approving the PIA. Judge Mary O’Malley Costello ruled in Tullamore Circuit Court to approve the PIA and impose the terms of the PIA on Pepper Finance, requiring it to give the debtors a 2.5% interest rate over 25 years. In her (unwritten) judgment, Judge O’Malley Costello appeared to have particular regard to the fact that Pepper Finance would not reveal what it had paid to purchase the debtors’ loan or the cost to Pepper Finance of servicing the loan and may have deemed that Pepper Finance accordingly failed to show they were unfairly prejudiced.

What does it mean?

Others struggling to keep up with increasing mortgage repayments will be wondering if they too could avail of a similar attractive agreement. While it seems likely that this judgment will encourage debtors and Personal Insolvency Practitioners to put forward aggressive proposals in the hope of reaching a favourable compromise with their creditors, it should be remembered that each PIA is different and based on its own set of particular facts and this is not an open door for debtors setting their own repayments.

It remains to be seen if Pepper Finance will appeal the judgment to the High Court; however it would seem likely given the potentially far-reaching consequences of the judgment. The judgment has the potential to have a further negative impact on the Irish residential mortgage market insofar as it may discourage any parties thinking of entering the Irish market in light of the departures of KBC and Ulster Bank recently. It may also negatively impact current market participants and any further departure of market participants could negatively impact borrowers. However, the exact consequences of the judgment are still to emerge. Market participants should keep a close eye on developments as this judgment has potential to have significant effects on the residential mortgage market.

Author:  Michelle Mcardle