The Bankruptcy Act 1966 (Cth) (the Act) provides a regime by which a debtor can compromise with his/her creditors outside formal bankruptcy. The provisions are found in Part X (Personal Insolvency Agreements) and Part IX (Debt Agreements) of the Act.
Debt Agreements under Part IX of the Act are designed for debtors who have limited liabilities and income and, accordingly, there are strict thresholds on who can propose a Debt Agreement. Those thresholds are revised twice a year - for the period 20 March - 19 September 2015, debtors who have unsecured liabilities which exceed $107,307.20, or their after tax income exceeds $80,480.40 cannot apply for a Debt Agreement.
A Debt Agreement proposal will be accepted if the majority of creditors vote in its favour. If accepted it will then bind all creditors, whether or not they voted in favour of it.
Debt Agreement proposals can be quite flexible, but most commonly proposals include:
- A lump-sum payment(s);
- A moratorium period on claims;
- A periodic payment schedule;
- A regime whereby third parties will contribute to repaying creditors to some extent.
PART X PERSONAL INSOLVENCY AGREEMENT (PIA)
A PIA is essentially a deed which binds creditors in dealing with an insolvent debtor's assets/liabilities.
In short, the PIA process is as follows:
- The debtor obtains the authority, under s.188 of the Act, of a person willing to be the Controlling Trustee.
- The debtor provides the Controlling Trustee with a statement of affairs (ss.188(2C), (2D) ), and the proposal must include a draft PIA (s.188(2E)).
- The Controlling Trustee will then call a meeting of creditors and take control of the debtor's property (s.188(1)). The Controlling Trustee will also provide a report on the proposal, which is required to include his/her opinion on the best option for creditors (ss.189A, 194).
- At the meeting the creditors may pass a special resolution to require the debtor to (s.204(1)):
- enter into a PIA;
- present a debtor's petition within 7 days; or
- to end the controlling trusteeship without any action being taken.
Pursuant to s.188A(2) of the Act, a PIA must set out the specific details and components of the PIA, such as how the debtor's property and income is to be dealt with during the administration, the extent (if any) to which the debtor is to be released from his or her provable debts, whether or not the antecedent transactions provisions of the Act will apply and so on.
If a PIA is proposed and accepted, it will be administered by a Controlling Trustee (usually a registered trustee, but it can also be a solicitor).
All creditors are bound by the PIA (s.229) and it will operate to release the debtor from all provable debts (s.230).
In terms of the administration of a PIA (such as the powers and responsibilities of the debtor and the Trustee), s.231 of the Act operates to apply many of the provisions relating to bankruptcy to PIAs.
Unlike a Debt Agreement, there are no thresholds for PIAs.
The primary advantage of Debt Agreements and PIAs is that, if accepted, the debtor avoids formal bankruptcy.
Other advantages include:
- The debtor may avoid some of the restrictions relating to bankruptcy, such as overseas travel, applying for credit, managing a corporation etc;
- The debtor may be able to retain assets (eg family home) that would in bankruptcy be sold for distribution to the creditors;
- Reduced personal stigma;
- Often far less costly that bankruptcy so that the creditor is not out of pocket in seeking a sequestration order;
- Potentially a larger dividend for creditors;
- Possibly greater flexibility, for example, in terms of which assets will be made available to creditors.
- Proceedings relating to creditor's petitions are stayed pursuant to s.189AAA.
The main disadvantages to Debt Agreements and PIAs are that they generally do not apply to secured creditors and that proposing a Debt Agreement or PIA is an act of bankruptcy. This means that if a proposal is rejected, a creditor can rely on the proposal in commencing bankruptcy proceedings against the debtor. Some of the other practical difficulties with Debt Agreements and PIAs are:
- often the proposal needs to sufficiently generous (in terms of the creditors) or onerous (in terms of the debtor) such that the implications of those schemes are similar to formal bankruptcy in any case.
- it is often difficult for creditors to assess the merits of a proposal given that it is unlikely that the Controlling Trustee (in the case of a PIA) has completed any substantive investigations in relation to the debtor's affairs.
- If creditors are required to enforce the terms of the PIA or Debt Agreement, any cost benefits of those regimes may be illusory.
CASE IN POINT
Each year AFSA publishes statistics on personal bankruptcies and trends in appointments and administrations. It is clear from recent and historical statistics that PIAs are scarcely being utilised by debtors in dealing with insolvency, with only 211 PIAs in 2013-2014 financial year. Debt Agreements under Part IX are more popular (10,706 in 2013-2014), but are still dwarfed by bankruptcies under Part IV and XI of the Act (18,592 of the Act).
Whilst PIAs will not be appropriate in all cases of personal insolvency, however, in the author's view there are many cases where it would be in the interests of creditors and debtors alike to consider a PIA. Legal and financial advisors have a big part to play in advising their clients in this regard and exploiting the possible benefits
AFSA frequently highlights the (commonly forgotten) fact that one of the key objectives of the Bankruptcy Act is the encouragement of alternatives to bankruptcy. We except, given the statistics, PIAs is a fertile ground for law reform. Watch this space.