That the developers owe colossal sums to the banks, we know. That the assets on which loans were secured have dropped in value, sometimes below the value of the outstanding loan, we also know. That some developers gave personal guarantees on top of the security in the development land, we also know and lastly that some developers offered security for loans with everything from yachts to wine collections via share portfolios.
And ultimately banks may need to pursue the developer by petitioning for bankruptcy. This entry examines the factors affecting the decision to bankrupt and then the mechanics of bankruptcy in Ireland and recovery of debts. This entry examines bankruptcy of individuals – receivership and liquidation of insolvent companies will be examined in a future entry.
Firstly, a glossary. Bankruptcy is the condition of an individual where the High Court has ordered the transfer of the assets of that individual to a trustee in bankruptcy for payment of the bankruptcy fees and the orderly payment of creditors. A Bankrupt is an individual subject to a Bankruptcy Order. A trustee in bankruptcy is a colloquial term for the Office of the Official Assignee in Bankruptcy and their job is to sell the bankrupt’s assets and pay off the creditors. Bankruptcy Court, there’s no such thing, it’s the High Court that deals with bankruptcy matters in Ireland though colloquially it may be referred to as the “bankruptcy court” when dealing with bankruptcy matters.
Development loans may have been granted to individuals or to companies in which they as individuals were involved (eg director, shareholder). Personal guarantees are given by individuals.
Considerations before seeking to bankrupt the borrower:
- Can the loan be recovered without recourse to bankruptcy? Banks will first seek judgements against defaulting borrowers. This will normally be via the State’s Commercial Court and will probably be the first step in most recovery actions. If the bank obtains a judgement they can effectively repossess the asset.
- What effect will bankruptcy have on the financial statements of the banks? The loan is presently showing as an asset in your balance sheet. It may not be performing but you might be booking rolled-up interest as income in your Profit and Loss Account and your assets might be increasing by a corresponding amount in your balance sheet. If the auditors were doing their job in ensuring financial statements reflected a “true and fair view” of the bank, this wouldn’t happen but auditors don’t appear to be too diligent in this area and they seem to rely on the opinion of managers in banks. Now if the bank bankrupts the developer the balance sheet might have to reflect a marked-to-market value for the asset and the bank may have a nasty provision or write-off in the Profit and Loss. And given that the asset may have a distressed value, that loss might be exacerbated.
- Given enough time and improvement in the market place the developer might be able to work out the loan? After all this is the developer’s business and they should have the best ideas as to how to develop a property or possibly seek other investors. Bankrupt the developer and that option may vaporise.
- If widespread actions are taken against developers then the bank might end up diversifying out of the banking business and into the property business. And banks may not want that. Equally if they are placing a large amount of property on the market at the same time as other lenders then this might depress prices further and you might end up with firesales of distressed assets which would only exacerbate the banks’losses.
- Will there be a loss of control over the asset? In the first instance the Office of the Official Assignee in Bankruptcy will administer the bankruptcy and will need to be satisfied as to the bank’s security. It will be the Assignee who decides how to treat the asset. They may sell it immediately and pass the proceeds to the bank.
- Personal guarantees may be difficult to enforce if the borrower has transferred assets to family members or elsewhere or if there are cross guarantees. Lenders may face a fight to have transfers set aside with borrowers potentially able to show that the transfers were arms-length and were not intended to defraud.
- If the loan is NAMA-bound then to the extent the banks can take bankruptcy action is unclear. The NAMA Act provides for loans created before December 2008 in respect of development land to be transferred but it is unclear to what extent banks can act on these loans if they are impaired before transferring them to NAMA and as described on this blog, there appears to be a gap in the NAMA system which might be to NAMA’s disadvantage.
So here is how a financial institution (FI) would go about bankrupting a borrower as an individual (company in solvencies have a different process).
- Assuming the FI’s paperwork is adequate and can be found (you’d expect that as a given but if you research some recent court cases in the State, you’ll see that this can’t be taken for granted), then a petition is submitted in the High Court.
- The High Court will appoint the Office of the Official Assignee in Bankruptcy (“the Assignee”) to administer the developer’s assets and debts.
- As a secured creditor the FI will be asked to place a value on the asset underpinning the loan, and either the Assignee will give the FI the asset or the value. The same with personal guarantees. The FI might encounter difficulties with cross guarantees with multiple claims on the same asset, particularly if the ranking of security was ignored when the loan was granted or personal guarantee given.
- The Assignee will establish the full liabilities and assets of the bankrupt and will liquidate the assets where possible and will arrange for the proceeds to be divvied up amongst the creditors (after deducting the costs of the bankruptcy). The Assignee may examine recent transactions by the bankrupt which moved property from the bankrupt to others and if they decide these transactions were intended to defraud creditors.
- If the bankrupt’s assets come to less than 50% of the outstanding liabilities and cost of the bankruptcy then the bankruptcy may last for upto 12 years. If the assets exceed 50% of the liabilities and costs then the bankrupt can be immediately discharged after the assets are liquidated and the creditors paid.
Bankruptcy in Ireland is draconian in the extreme. Lasting for upto 12 years (and possibly longer if the court is not satisfied you haven’t given up all assets) with your travel outside the country restricted if the Trustee in Bankruptcy thinks you’re avoiding your debts, attachments to salary leaving you with the bare minimum to live, barred from being a director or manager of a company, barred from holding elected office like local councillor or Deputy/Senator and your name permanently branded into the publicly-available Bankruptcy List. In fact it’s so draconian that even death won’t discharge you. And of course Ireland is signed up to the EU Insolvency Regulations 2002 which means that assets elsewhere in Europe can be seized. If you have assets to pay your creditors 50% of what you owe (and on the basis that all of your assets have been realized) and you can also afford the bankruptcy costs then you can seek to be discharged when the 50%+ payment has been made.
So why not become a bankruptcy tourist? Take a look at this article from a respected UK online finance website. “In the year to March, 59 foreigners filed for bankruptcy in the UK after residing here for less than 12 months, where all or most of their debts were abroad, according to figures obtained by This is Money from the Government-backed Insolvency Service.” Why consider bankruptcy tourism to the UK? Because the bankruptcy will only last one year and has application throughout Europe. This is a highly involved area of law of course and anyone in this position should get more reliable legal advice.
After bankruptcy. So the developers will be living in some estate in Leitrim (sorry Leitrim, it’s just you’re the posterboy of over-supply of property) and will be unemployable, will be lucky to drive some jalopy and be living off nettle soup? That’s very doubtful and it’s more probable that the will continue to live in their family home (if they have a spouse) and claim rights under the Family Home Protection Act and that might mean they continue living on Ailesbury Road. Many developers have a demonstrable record of making money, developing ideas, have established networks of contacts and support and have experience of conducting business on an international basis. So property here is moribund (though even now there are opportunities) but they may well secure high-paying employment in jurisdictions where they don’t need account to the trustee in bankruptcy. And if employed in the State the company may provide a package of benefits which might include the odd Porsche or helicopter and a decent expense account for fine dining. Also the developer might be bankrupt but his wife won’t be and she will have been entitled to take a share of income during the last decade which might mean that as a family, they are still very well off so golf, expensive holidays and the boat may stay. And of course this is before you consider any shenanigans in squirreling away money and assets during the good years (and indeed the bad years until judgement day in the High Court when responding to the bankruptcy petition). There will be some discomfort (see bankruptcy in Ireland above) but practically speaking this may not affect lifestyles at all.