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Section 73 proposals: What are they & how do they work?

During a bankruptcy, a bankrupt may be in a position to make a proposal to their creditors to satisfy their debts and consequently end their bankruptcy early.

What is a section 73 proposal?
During a bankruptcy, a bankrupt may be in a position to make a proposal to their creditors to satisfy their debts and consequently end their bankruptcy early. Section 73 of the Bankruptcy Act 1966 provides a bankrupt with a mechanism to make that proposal.

If a section 73 proposal is accepted, the creditors would expect to receive a larger distribution than they would receive under the continued bankruptcy.

How does a bankrupt make a proposal?
The bankrupt is required to send a written proposal to their trustee and request that a meeting of creditors be called to consider the proposal. The proposal’s particulars are set out in the written request. The trustee will investigate the benefits of the proposal as necessary, issue a report and call a meeting for the creditors to vote to accept or reject the proposal.

The bankrupt will usually be required to pay the trustee to undertake this process, as there is no requirement for estate funds to be used for this purpose.

If the proposal is accepted, the bankruptcy will be annulled from the acceptance date. If the proposal is not accepted, the bankruptcy will continue as if the proposal had never been put to creditors.

Composition or arrangement?
A section 73 proposal can be structured as either:

  • a composition
  • a scheme of arrangement.

A composition is an agreement to pay money to the trustee. The composition can be for any amount and can be paid over any period.

A scheme of arrangement can contain almost any lawful provision. It can contain provisions for the payment of monies, the sale of certain assets, and payments from third parties.

Investigating and reporting
Before the meeting of creditors, the trustee will conduct investigations. Once satisfied, the trustee will issue a report to creditors detailing the proposal’s terms. The report will compare the likely returns from the proposal to the bankruptcy’s continuation.

Delays in calling a meeting of creditors
A trustee can decline to call a meeting of creditors if the proposal does not provide for the trustee’s approved fees and expenses or costs to be paid. Prior to the proposal being examined, the trustee may also require the bankrupt to pay an amount (called a surety) to cover the trustee’s costs, and to cover the trustee’s fees to investigate the proposal, and to call and hold the meeting.

How is the proposal accepted?
The proposal is put to a meeting of creditors under the same provisions as bankruptcy meetings. Only the creditors at that meeting vote on the proposal. It must be accepted by a special resolution, which is both a majority in number of the creditors (present and voting), and at least 75 per cent of the dollar value of the creditor’s debts (present and voting). So it is in every creditor’s best interests to attend and vote on a section 73 proposal.

If the proposal is accepted, the bankruptcy is consequently annulled. The now ‘ex-bankrupt’ will be bound by the agreement terms. The agreement binds all creditors, whether or not they attend or vote at the meeting.

Who administers a section 73 proposal?
The proposal must include a provision for a trustee to administer the agreement. Usually, the bankruptcy trustee will administer the agreement; however, a different trustee can be appointed under the agreement. The trustee’s role is to:

  • ensure that the ex-bankrupt complies with the agreement’s terms
  • enforce the provisions as necessary
  • pay dividends.

What about the trustee’s actions during the bankruptcy?
Section 74 of the Bankruptcy Act provides that the actions of the bankruptcy trustee during the bankruptcy period remain valid. Without this provision, the bankrupt or any party to a bankrupt’s transactions would be able to challenge its validity.

Can the trustee pay dividends?
Yes. The trustee of the agreement will make distributions under the agreement terms. If the agreement does not stipulate these provisions, the trustee will make distributions when practical and when the agreement is likely to end.

When does a section 73 agreement end?
The agreement ends when the debtor (the ex-bankrupt) satisfies the agreement terms in full.

What if the debtor defaults?
If the debtor does not satisfy the agreement terms, section 76B of the Bankruptcy Act provides enforcement provisions. All of the powers that are available to a trustee under Part X of the Bankruptcy Act (in the enforcement of personal insolvency agreements) are available to a trustee of a composition or scheme of arrangement. These include terminating the agreement either:

  • automatically through the agreement terms
  • with creditors’ consent
  • by creditor resolution
  • by court order.

Any application to the court to terminate the agreement can also include an application to bankrupt the debtor to initiate a new bankruptcy.

Government realisation charge
The administration of section 73 proposals attracts a government charge known as a ‘realisation charge’. The current rate is 7 percent of gross monies received into the estate, less payments to secured creditors and trade-on costs. The realisation charge is payable in priority to any dividend 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