Part X Personal Insolvency Agreements

What is Part X of the Bankruptcy Act?

Part X (Part 10) is a part of the Bankruptcy Act that allows a debtor to enter into an arrangement with their creditors to satisfy their debts without being made bankrupt. This arrangement is called a personal insolvency agreement.

Why choose a Part X agreement?

A debtor will usually use a personal insolvency agreement to:

(i) get relief from their debts;
(ii) ensure a fair distribution of their assets to creditors;
(iii) provide a higher dividend than would be payable in bankruptcy;
(iv) maintain their source of income; and
(v) avoid the restrictions of bankruptcy.

How is the process started?

A debtor must choose a controlling trustee (a solicitor or a registered trustee in bankruptcy) and provide them with three documents:

1. an authority under Section 188 giving the controlling trustee control over their assets and requiring them to call a meeting of creditors;
2. a statement of affairs detailing all assets, liabilities and other personal information:
3. 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 will forward the material to ITSA (Insolvency & Trustee Service Australia) for registration on the official record. ITSA will then give the estate an 'estate number'.

What is a personal insolvency agreement?

It is the formal agreement between a debtor and their creditors that sets out how the debtor will satisfy their debts. It is in the form of a deed executed by the debtor and their trustee once creditors have agreed to the proposal.

What can be proposed to creditors?

The proposal can contain almost any lawful term. Usually it will provide for the payment of money over time and the sale of some assets. It will also usually contain a moratorium from creditor's claims throughout the term of the agreement, and payment of a sum less than the full amount in full satisfaction of claims.

How is the proposal accepted?

The controlling trustee must hold a meeting of creditors within 25 business days after the appointment. The creditors attending this meeting will decide whether to accept the proposal or not. A majority in number of the creditors and more than 75% in value of creditors attending and voting at the meeting must vote in favor of the proposal for it to be accepted. This is called a special resolution.

If the proposal is not accepted, the creditors may resolve that the debtor bankrupt themselves, but cannot actually bankrupt the debtor. Creditors may also resolve that the debtor be released from the control of the controlling trustee allowing creditors to commence recovery action or bankruptcy proceedings against them.

Is signing a section 188 authority an act of bankruptcy?

Yes. In the course of the Part X process a debtor will commit a number of acts of bankruptcy, including signing the section 188 authority, the holding of a meeting of their creditors and obtaining a special resolution by creditors. Any creditor may use these acts 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 creditor's rights under their securities remain intact. They may exercise their rights regardless of the outcome of the meeting and acceptance of the proposal.

Unsecured creditors with debts that would be provable in a bankruptcy exchange their right to enforce their claims for a right to share in the proceeds of the personal insolvency agreement. If accepted by the required majority, all unsecured creditors will be bound by a agreement whether they attended the meeting or voted in favor of the proposal or not.

How does the agreement affect the debtor's property?

Only property that is included in the personal insolvency agreement is affected. Property that is not included in the agreement is not available to creditors.

How does the agreement affect income earned during this period?

The debtor is only required to contribute some of their income if the agreement includes terms requiring them to do so. When applicable, the debtor will make the same type of contribution out of income that they would if they were bankrupt.

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.

What does the trustee do?

The powers and obligations of the trustee will be set out in the agreement and the Bankruptcy Act. They essentially will be to enforce the terms of the agreement, sell any assets, collect any monies and make a distribution to creditors.

What happens if the debtor does not comply with the terms of the agreement?

If the terms of the agreement are not satisfied, the agreement will be considered to be in default. Usually a default notice will be issued to the debtor within a few days after the default. If the default is not rectified, the agreement will be breached and may be terminated by:

(i) the provisions of the agreement, automatically terminating the agreement;
(ii) the trustee terminating the agreement with the consent of creditors;
(iii) the passing of a special resolution at a meeting of creditors, or
(iv) an application to the Court to terminate the agreement and possibly bankrupt the debtor.

Can the trustee pay dividends?

Yes. The trustee will make distributions in accordance with the terms of the agreement.

When are dividends paid?

This will depend on the duration of the agreement 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 realized and all funds collected. If the agreement will extend over a long period, the trustee may make interim distributions as money becomes available.

Does signing a section 188 Authority affect a credit rating?

Yes, the fact that the debtor has signed a section 188 Authority will be noted by credit agencies. But this may be more favorable than outstanding writs, defaults and a bankruptcy on the debtor's file.

Can a debtor continue to act as a director of a company?

No. A debtor cannot act as a director whilst subject to the terms of a personal insolvency agreement. This restriction is lifted when the agreement has ended.

When does a personal insolvency agreement end?

The agreement ends when the debtor fully satisfies the requirements of the deed.

Government Realisation Charge

The administration attracts a government charge known as 'Asset Realisation Charge'. This charge is payable at the rate of 4% of gross monies received into the estate, less payments to secured creditors and trade on costs. It is payable in priority to any dividend to creditors.

Disclaimer
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.

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Last Updated: 1.2.2010