A Personal Insolvency Agreement, otherwise known as a PIA, is a flexible arrangement between debtors and their creditors. It involves a debtor putting forward a proposal as to how their financial affairs should be administered with a view to ensuring that creditors receive a dividend in respect of their debts.

A PIA will only come into operation if it has been accepted by a special resolution at a meeting of creditors – meaning a majority in numbers and at least 75% in value must vote in favour of the PIA.

As can be seen from the recent case of Cross v Rullo (Trustee) [2013] FCA 837, the acceptance  by  creditors  of  the  PIA  does not mean that the PIA will remain in place. The  Court  has  the  power  pursuant  to section 222 of the Bankruptcy Act 1966 to set aside a PIA.

Cross v Rullo

The matter of Cross v Rullo involved a creditor of a bankrupt (Cross) applying for a PIA entered into by the first respondent (Rullo) be set aside and for a sequestration order to be made. Michael Lhuede (Piper Alderman, Melbourne) acted on behalf of Rullo’s Trustee in Bankruptcy (Trustee) and supported Cross’s application.

The PIA had been accepted by majority vote and had been recommended by the Trustee (on the information available to the Trustee at the time).

In summary, information subsequently came to light after the PIA was entered into which caused the validity of certain debts to be questioned, in particular a judgment debt.

Cross and the Trustee submitted to the Court that it was appropriate for the Court to look behind the judgment debt to see whether there was a real debt behind the judgment debt.

It  was  deemed  necessary  by  the  Court that, given the nature of the allegations, and  evidence  submitted  by  Cross  and  the Trustee  in  relation  to  the  judgment  debt, there was a public interest in a proper investigation into Rullo’s affairs, which could not occur under the PIA.

Accordingly, the Court set aside the PIA pursuant to section 222(1)(e) of the Bankruptcy Act 1966 and sequestration of Rullo’s estate occurred.

This case illustrates two key points:

  • The power of a Court to look behind a judgement
  • That a PIA entered into on the basis of untruths or misinformation may be set aside by the Court.

Sarah Drinkwater & Timothy Logon