Across the corporate and household sector, the impact of a great storm cloud of indebtedness is now being felt. The figures are quite startling.

Last year, the consultancy Amarach Research produced a report entitled: ‘The Debt of the Nation : How we Fell in and out of Love with Debt.”

This study estimated that in Ireland, the ratio of household debt to disposable income had risen from just 48% in 1995 to 176% last year, making us one of the indebted countries in the world, even when public debt is excluded from the equation.

Since the downturn, the number of insolvencies has soared, along with the number of ‘problem’ debts across the banking system. More than 1,400 companies were declared insolvent in 2009 alone, almost five hundred of these being construction firms.

The scale of the crisis is made clear in an in depth report from the Law Reform Commission which proposes a widespread series of reforms in the area of personal debt management and debt enforcement.

The key conclusion is that Irish personal insolvency law is in need of comprehensive reform. The current 1988 Bankruptcy Act is viewed as ineffective, with extraordinarily low numbers of bankruptcies in Ireland compared to other countries, with the result that many are left in effective commercial limbo.

Earlier this year, the Minister for Justice, Dermot Ahern, requested the Commission to come up with practical proposals aimed at addressing what is an urgent situation.

Last Autumn, the Commission produced a consultation paper on debt management.

A key conclusion in the consultation paper was that “Irish personal insolvency law is in need of comprehensive reform and that the Bankruptcy Act 1988 is inappropriate to meet the needs of modern social and economic conditions in a credit society.”"

Patricia Rickard Clarke is the only Full time Commissioner at the Law Reform Commission and has been in this position since 2002. The LRC is chaired by another woman, the former Supreme Court justice and Senator, Catherine McGuinness.

Ms Rickard Clarke is an expert in commercial law, serving for many years as a partner in the Dublin law firm, McCann Fitzgerald, where her husband, David Clarke, remains a senior partner.    

An an Interview with Vistage Ireland, Patricia provides an update on some of the work she has carried out at the Commission and highlights some of the key issues identified in the Interim Report on debt management and enforcement.

“As Commissioner, my focus is on the civil law side. We have achieved quite a bit in terms of the implementation of legislation.”

She identifies the following areas where reforms to the law have been proposed, or are in train:

- Land law.

- trust legislation

- Alternative dispute resolution

- Operation of the courts.

- Mental capacity.

- Regulation of charities

- Regulation of multi unit (duplex/apartment) developments.

Land law:

“The 2009 Act has repealed around one hundred and fifty pre -1922 pieces of legislation as well as some legislation passed after Independence. We did away with feudal tenure and abolished perpetuity periods.” There are now just two forms of ownership, leasehold and freehold – there are no more ‘lives in being.’

As a result of the reforms, those involved in property transactions should come up against fewer problems concerning the title to the land, or other property.

This should simplify the position of trustees who now have ‘absolute power to deal in land.’

Capacity:    

“Mental capacity is a huge priority of mine. The legislation was archaic, with its references to ‘lunatics’ and ‘people of unsound mind.’ Ireland was out of step with other jurisdictions with regard to guarantees of the right of privacy, autonomy, dignity.

In assessing capacity, it was a case of the old ‘all or nothing ‘ model. 

In dealing with people suffering from dementia, for example, the modern approach is different. One assesses people with respect to the (particular) decision they have to make.”

The status quo could no longer be maintained faced with sanctions from the European Court of Human Rights.

The Law Reform Commission proposed the establishment of an independent Guardianship Board, consisting of a three person panel, to assess capacity. The Department of Justice instead opted for a court to be known as a Court of Care & Protection, along English lines.

Charities:

Reforms to the law on the supervision of charities were originally proposed, back in 1976, by the then Attorney General, Declan Costello. Little if anything was done to put those proposals into practice. As a result, the less scrupulous have enjoyed a field day, while the vast majority of charities which are genuine have had no way of distinguishing themselves properly from the small number of rogues.

Last year, legislation was brought in to establish a charities regulator.

“Only small parts of the legislation are in force. There is a hold up due to financial issues around the setting up of the regulator..”

“Charities have been used for money laundering….. there is need for a proper structure.”

Courts Act:

“This is a large piece of work. It involves the total consolidation of all the Courts Acts. We have published a consultation paper and are working on a final report.”

We are repealing 160 to 170 pieces of legislation, making the language more comprehensible to the ordinary citizen. The process of making application to the Court .. we are going to simplify all of that. It is about access to justice – the language is very archaic.”

“We held a number of seminars and the issue of jury membership kept coming up. We have just published a consultation paper in which we talk about the need for a greater spread of people, with fewer exemptions from jury service. Lawyers are automatically exempted from service. Should they be? ”

Access to Justice:

 Since 2006, the Commission has been working on an index to the statutes and it has also been involved in a restatement of legislation since 2007.

Whenever a piece of legislation is amended, the main Act will be automatically altered to reflect this. Under the system as it stands, it is frequently necessary to consult several pieces of statute, – Acts, amending regulations or statutory instruments – in order to determine the true state of the law.

The Commission has already completed a restatement of the Central Bank Acts, the Freedom of Information Act, & the Ethics in Public Office Act.

These restatements have yet to be formally certified.

“We would be behind other jurisdictions when it comes to restatements. Canada and Australia, for example, would be streets ahead of us…We see all of this as a precursor to e-legislation.”

Unfortunately, this very necessary and time consuming process could be halted in its tracks as a result of the public service recruitment embargo.

“We had fifteen researchers in place up until last year. The number has fallen to eight. This will affect our output.”

 Debt management:

The Government has requested the Law Reform Commission to come up with practical proposals aimed at addressing what the Justice Minister, Dermot Ahern, recognises to be a growing problem across society.

The Commission has prepared a consultation paper, which it has followed up with an Interim Report. Both documents are entitled: “Personal Debt Management and Debt Enforcement.”

It is being pressed to come up with practical suggestions to assist in tackling the crisis, in the short term.

A working group has been established drawn from among the following bodies:

the Court Service, the Departments of Finance & Justice, the financial Regulator, the Irish Banking Federation and the Money Advice Bureaux.

Reliance has also been placed on reports prepared by FLAC.

In parallel, a separate Mortgage Arrears & Personal Debt Review Group has been established under the leading insolvency expert, and current Enterprise Ireland Chairman, Hugh Cooney.

Its members include Matthew Elderfield, the Financial Regulator, Pat Farrell, CEO of the Irish Banking Federation and Paul Joyce of FLAC, the Free Legal Aid Advice Centres.

Patricia Rickard Clarke is a also member of this group which has been mandated to present recommendations, on a rolling basis, to the Minister for Finance.

In preparing the Interim Report on debt management, the Law Reform Commission examined the EU recommendations in the area. There, key goals were identified including: responsible borrowing and lending, arrears management & debt counselling, an overhaul of personal insolvency law and a move to more ‘holistic’ court procedures.

Says Patricia:

“We felt that there were gaps in the present structure. Ireland has no (national) database for credit reporting. The Irish Credit Bureau is a private company – the information is volunteered. Not all financial institutions are members of this body.”

While there is the matter of data protection to be considered, financial institutions need to be able to gain reliable information on those approaching them for a loan.

Another key gap is in the regulation of money advisors and debt collectors. 

The Law Reform Commission plans to address the whole issue of debt collection in its final report on the issue of debt management.

Key findings to date :

Says Patricia Rickard Clarke: “In our consultation paper, we concluded that we have to have a non judicial debt settlement system. We are very court intensive.” As a result, the courts receive a huge number of applications for the recovery of debts. In many cases, judgements are handed down in the absence of the debtors in question.

“We felt that it is not good for the judicial system to have judges making futile orders.”

As things stand, judges are being tied up in time wasting procedures at great cost to the taxpayer.

“Our bankruptcy legislation is based on 19th Century thinking (on punishment) . If you owe debts, each creditor can take you to court.”

“There needs to be a proper efficient system.”

Change is already in the air. As a result of a ruling last year in the High Court by Judge Laffoy, the numbers being committed to prison for non payment of debts has fallen from 4,600 in 2008 to just over 2,760, last year, this at a time of financial meltdown.

The Commission has called for the putting in place of a Pre Action Protocol in consumer debt claims. This would tackle the general problem of lack of engagement of debtors.

A recent study by FLAC revealed that none of 38 debtors surveyed attended a consumer debt claim brought against them. Only two out of fourteen attended a debt and imprisonment hearing.

Many debtors cannot afford legal representation.

It is proposed that debt advisors (from MABS, for example) be permitted to represent debtors ar hearings.

The Commission wants the introduction of a parallel non judicial debt settlement system.

Patricia also believes that some form of debt forgiveness system is required, involving an accommodation with the agreement of a majority of creditors. In her view, there has to be a system  allowing for the discharge of debts, bringing Ireland into line with other countries.

Such a system would benefit business people and others, many of whom have fallen into debt often through no fault of their own.

The view is that such a reform would facilitate entrepreneurship and economic growth, as entrepreneurs on their second undertaking would be more effective than on their first, having learned some key lessons from their first failure.

Written by Kyran Fitzgerald