Subject to certain criteria, a debtor could choose to enter into a personal insolvency agreement (PIA) with their creditors to satisfy their debts without being made bankrupt.
What is Part X of the Bankruptcy Act?
Part X (part 10) of the Bankruptcy Act 1966 allows a debtor to enter into a personal insolvency agreement (PIA) with their creditors to satisfy their debts without being made bankrupt.
What is a personal insolvency agreement?
A personal insolvency agreement (PIA) is a formal agreement between a debtor and their creditors that sets out how the debtor will satisfy their debts. Once executed by the debtor and their trustee—and when creditors accept the proposal—it forms a deed.
The proposal can contain almost any lawful term and condition. Usually, it will provide for the repayment of monies over time and in some cases, the sale of assets. It also usually contains a moratorium (or freeze) from creditor’s claims for the term of the agreement, and payment of a sum that is less than the full amount in full satisfaction of their claims.
Why choose a Part X agreement?
A debtor may use a personal insolvency agreement to:
- get relief from their debts
- ensure a fair distribution of their assets to creditors
- provide a higher dividend than would be available in bankruptcy
- maintain their source of income that may be affected by bankruptcy
- avoid the restrictions of bankruptcy.
How is the process started?
A debtor must choose a controlling trustee (e.g. a solicitor or a registered trustee in bankruptcy) and provide them with three documents:
- An authority under section 188 of the Bankruptcy Act giving the controlling trustee control over their assets and requiring them to call a meeting of creditors to consider the proposal.
- A Statement of Affairs detailing all assets, liabilities and other personal information.
- A draft personal insolvency agreement detailing the terms of the proposal to be made to creditors.
The controlling trustee will sign a ‘consent to act’ and forward the documentation to the Australian Financial Security Authority (AFSA) for registration on the official record (the National Personal Insolvency Index). AFSA will then allocate an ‘estate number’ to the PIA.
How is the proposal accepted?
Once appointed, the controlling trustee must hold a meeting of creditors within 30 business days. At the meeting, the creditors will decide whether to accept or reject the proposal. For the proposal to be accepted there must be a majority in both the number of the creditors and more than 75 percent in value (ie creditors holding over 75% of the debt) in favour. This type of vote is called ‘a special resolution’.
If the required majority does not accept the proposal, the creditors may resolve that the debtor become bankrupt, but they cannot actually bankrupt the debtor at that meeting. However, creditors can resolve that the debtor be released from the control of the controlling trustee, which allows creditors to commence recovery action or bankruptcy proceedings.
Is signing a section 188 authority an act of bankruptcy?
Yes. During the Part X process a debtor will commit a number of ‘acts of bankruptcy’, including signing the section 188 authority, calling a meeting of their creditors and obtaining a special resolution by creditors. Any creditor can use these actions to apply to the court to have the debtor made bankrupt if the proposal is not accepted.
How are creditors affected by the personal insolvency agreement?
Secured creditors’ rights under their securities remain intact. They can exercise their rights regardless of the whether the proposal is accepted or not. Unsecured creditors with debts provable in bankruptcy exchange their right to enforce their claims for a right to share in the PIA proceeds. If the proposal is accepted by the required majority, all unsecured creditors will be bound by the agreement regardless of whether they attended the meeting, and regardless of whether or not they voted in favour of the proposal.
How does the agreement affect the debtor’s property and income?
Only property that is included in the PIA is affected. Property that is excluded from the agreement is not available to creditors. The debtor is only required to contribute part of their income if the agreement includes terms requiring them to.
Can the trustee pay dividends?
Yes. The trustee will make distributions in accordance with the agreement terms. When dividends are paid will depend on the agreement duration and when funds become available. If the duration is expected to be short, the trustee will usually pay a dividend when all of the assets have been realised and all funds collected. If the agreement extends over a long period, the trustee may make interim distributions as funds become available.
When does a personal insolvency agreement end?
The agreement ends when the debtor satisfies the deed’s requirements in full.
What happens if the debtor does not comply with the agreement terms?
If the terms of the agreement are not satisfied, then the agreement will be considered to be in default. Usually, a default notice is issued to the debtor within a few days and, if not rectified, the agreement will be breached and may be terminated by one of these methods:
- The provisions of the agreement, automatically terminating the agreement.
- The trustee terminating the agreement with the consent of creditors.
- The passing of a special resolution at a meeting of creditors.
- An application to the court to terminate the agreement and possibly bankrupt the debtor.
Who administers a personal insolvency agreement?
The proposal for an agreement must include the appointment of a registered trustee or the Official Receiver to administer the agreement. If no one is nominated, the Official Receiver will be the trustee. Their powers and obligations will be set out in the agreement and in conjunction with the Bankruptcy Act. Fundamentally their role is to enforce the terms of the agreement, sell any assets, collect any monies and make a distribution to creditors.
Does signing a section 188 authority affect a credit rating?
Yes. Credit agencies will record that the debtor has signed a section 188 Authority. But this may be more favourable to the debtor than having outstanding writs, defaults, and a bankruptcy on their file.
Can a debtor continue to act as a director of a company?
No. A debtor cannot act as a director while subject to the terms of a PIA. This restriction is lifted when the agreement has ended.
Government realisation charge
The administration of a PIA attracts a government charge known as an ‘Asset Realisation Charge’ (ARC). This charge is payable at the rate of 7 percent of gross monies received into the estate, less payments to secured creditors and trade on costs (ie normal business trading expenses). The realisation charge is payable in priority over any dividend payable to creditors.
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.
Last Updated: 3.11.2017