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Section 73 Proposals

What is a section 73 proposal?

During the course of a bankruptcy, a bankrupt may be in a position to make a proposal to his or her creditors to satisfy their debts and have their bankruptcy annulled. Section 73 provides a bankrupt with the mechanism to make a proposal.

If accepted, the creditors would expect to receive a larger distribution than they would receive under the continued bankruptcy, and the bankrupt would be released from the restriction of the bankruptcy.

How do you make a proposal?

The bankrupt will send the proposal to their trustee and request that a meeting of creditors be called to consider the proposal. The trustee will conduct any necessary investigation into the benefits of the proposal, issue a report and call a meeting for the creditors to vote on the proposal.

If the proposal is accepted, the bankruptcy will be annulled at the time of the acceptance. If the proposal is not accepted, the bankruptcy will continue as normal. The bankrupt will be able to be make another proposal at a later date.

Composition or Arrangement?

A proposal under section 73 can be either a 'composition' or a 'scheme of arrangement'.

A composition is an agreement to pay monies to the trustee, who distributes the money to creditors. The composition can be for any amount (as a definite sum or as a percentage of the total debts), and can be paid over any time period.

A scheme of arrangement ("arrangement") can have almost any lawful provision. It can contain provisions for the payment of monies, the assignment of certain assets, payments from third parties, or any combination of these factors.

Investigating and Reporting

Before the meeting of creditors is held, the trustee will conduct investigations and issue a report to creditors detailing the terms of the proposal. The report will compare the likely returns from the proposal and from the continuation of the bankruptcy, and contain a notice calling the meeting. The report will not be issued until the investigations are complete. The trustee can not be rushed into forwarding a proposal before he or she has properly examined it.

Delays in calling a meeting of creditors

A trustee is entitled to refuse to call a meeting if the proposal does not adequately provide for the payment of the bankruptcy trustee's approved fees and outlays.

The trustee also may require that the bankrupt pay an amount (a surety) to cover the costs and fees of the trustee for investigating the proposal, calling and holding the meeting. This money will have to be paid before the proposal is examined.

How is the proposal accepted?

The proposal is put to creditors at a meeting called under the same provisions as bankruptcy meetings. The creditors at that meeting vote on the proposal. The proposal must be accepted by special resolution, which is both a majority in number of the creditors present and voting, and 75% of the dollar value of the creditors debts present and voting.

What happens if the proposal is accepted?

One of the benefits to a bankrupt is that the bankruptcy is annulled, which is a complete undoing of the bankruptcy. An other is that the agreement is binding on all creditors, whether they attend or vote at the meeting or not.

Who administers a section 73 proposal?

The proposal must include a provision for a trustee to administer the agreement. It is usual that the trustees of the bankrupt estate will be the trustees of the section 73 agreement, but a new trustee may be appointed under the agreement.

What does the trustee do?

The trustee's role is to ensure that the agreement is being followed by the ex-bankrupt and enforce the provisions as necessary. They will also pay a dividend to creditors.

What about the acts of the previous bankruptcy trustee?

Section 74 of the Act provides that the acts of the bankruptcy trustee during the period of bankruptcy remain valid. If this provision was not part of the Act, the debtor or any party to a transaction would be able to challenge its validity.

What if the debtor defaults?

Section 76B provides the enforcement provisions. These will be used if the debtor does not fulfill the terms of the agreement. All of the powers that are available to a trustee under Part X of the Act (in the enforcement of Personal Insolvency Agreements) are available to a trustee of a composition or arrangement. These include:

(i) The terms of the agreement automatically terminating the agreement on a default;
(ii) The trustee terminating the agreement with the consent of creditors;
(iii) The creditors resolving to terminate the agreement; or
(iv) The Court terminating the agreement.

Any application to the Court can also include an application to bankrupt the debtor and start a new bankruptcy.

Can the trustee pay dividends?

Yes. The trustee will make distributions under the terms of the agreement, or if they are silent, when practical.

When does a section 73 agreement end?

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

Government Realization Charge

The administration attracts a government charge. This charge is payable at the rate of 3.5% 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: 30.1.2008