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Published 18 September 2017
A recent High Court ruling which examined the practice of creditors entering into a "split mortgage" or warehousing agreement with debtors as part of a personal insolvency arrangement ("PIA") (pursuant to the Personal Insolvency Act 2012) is likely to result in banks reconsidering warehousing as a "go to" option when entering into PIAs with defaulting debtors.
In Re Callaghan, KBC Bank Ireland plc ("the Bank") appealed an earlier Circuit Court decision to approve a PIA. The PIA debt arose from a mortgage held by the Bank over the home of a married couple, Paula and Colm Callaghan ("the Debtors") in Drogheda, Co. Louth. The mortgage fell into arears and a PIA was proposed on the Debtors' behalf to the Bank. The mortgage debt was €285,647 and the value of the house was set at €105,000.
A 6 year PIA was proposed, as part of which €165,647 would be written off, leaving a live mortgage balance of €120,000. The Bank rejected this proposal, instead offering to write off €15,000 of the debt and thereafter splitting the remainder into two equal portions of €135,000, one portion of which would continue to be repaid by the Debtors and the remaining portion of which would be placed in a "warehouse" account carrying 0% interest. The Debtors would be given "lifetime tenure" in the house and the Bank's security would not be enforceable until the survivor of them died.
The benefit of this arrangement from the Bank's perspective was that the Debtors could continue to live in the house for their respective lives, affordable mortgage repayments could be made by them in the meantime and the Bank could, in time, recover the "warehoused" portion of the mortgage.
Whilst expressly confirming that the legislation does permit the long term warehousing of part of a mortgage debt, Ms. Justice Baker rejected the Bank's appeal, stating that "a warehousing solution should on present or known figures offer a solution to indebtedness that is likely to be achieved." In the current case, Ms. Justice Baker was not convinced that the proposed warehousing solution offered by the Bank was feasible, stating that the proposal was capable of creating circumstances amounting to insolvency at the end of the mortgage term in 23 years' time. Ms. Justice Baker remarked that neither of the debtors had the benefit of a pension scheme which might provide a lump sum on retirement to satisfy the warehoused amount and therefore, it had not been offered on the basis that it was likely that a solution to the indebtedness would be achieved.
The ruling in Re Callaghan is likely to result in creditors thinking twice before offering a warehousing solution to defaulting debtors. Ms. Justice Baker made it clear that where such an option is put forward, there must not be uncertainty as to the debtor's ability to make future repayments on the warehoused portion of the mortgage. The ruling will undoubtedly provide debtors with a stronger hand in negotiations with creditors in circumstances where creditors will now be obliged to consider a warehousing solution only in the context of present or known figures.
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