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Part IX Debt Agreements

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Introduction

Part IX is the one of the parts of the Bankruptcy Act which allow debtors to make arrangements with their creditors to resolve debt issues, without being made bankrupt. This is done through what is called a Debt Agreement. Part IX has some similarity to Part X of the Bankruptcy Act, but there are significant differences including who may make a proposal under this part.

A debtor will make a Part IX proposal to:

1. get relief from his or her debts;
2. ensure a controlled distribution of the assets include in the proposal;
3. pay a higher dividend to creditors than would be paid in bankruptcy;
4. maintain his or her source of income; and
5. avoid the restrictions of bankruptcy.

This paper contains links to legislation. These will open in a separate window. Most of the legislation shown in this paper is only a summary or extract of the entire section. The links go to the entire section.

Eligibility to make a proposal

A debtor will be ineligible to propose a debt agreement if, in the last 10 years, they:

(a) have been a bankrupt,
(b) have been a party to another debt agreement, or
(c) have given an authority under Part X

A debtor is eligible to propose a debt agreement if their:

1. net after tax income does not exceed $66,284* (being 150% of the income contribution threshold with no dependents);

2. unsecured creditors must not exceed $88,379* (being twice the income contribution threshold with no dependents); and

3. divisible property (that is property which would be available if the debtor were to be made bankrupt) must not exceed $88,379* (being twice the income contribution threshold with no dependents).

* These figures increase every 6 months and are current at 20 March 2010. Worrells website has the updated figures on the Figures Page.

Types of Part IX Debt Agreements

There is only one form of a debt agreement, but it may include a wide range of terms. Agreements may include payments over time or the payment of a lump sum. The funds may come from the debtor or from a third party. It may include such things as realizations of real property, plant and equipment and stock, or the handing over of specific assets to specific creditors. Almost any legal condition may be included in a Debt Agreement.

Some of the more common factors found in debt agreements are:

(a) payment of a sum less than the full amount owed to creditors;
(b) the transfer of specified property to specified creditors;
(c) periodic payments over time, i.e. monthly or quarterly of a specified amount; and
(d) a release of all debts.

Once accepted, the terms of the debt agreement will affect any of the debtor's property included in the debt agreement. If the agreement calls for the sale of certain assets, then the debt agreement administrator has the responsibility of realizing those assets and paying those funds to creditors in accordance with the provisions of the debt agreement. If certain assets are not dealt with under the agreement, the debt agreement administrator will not realized or otherwise deal with them.

The debtor's income will not be affected unless the agreement provides for contributions to be made out of any income earned during the period of the debt agreement. The agreement may, for example, provide for the debtor to pay a percentage of his business or personal income over a period of time.

Elements of Part IX Debt Agreements

Authority to act

A debtor must complete a debt agreement proposal and the appropriate statement of affairs. The debt agreement proposal must:

1. identify the property to be dealt with;
2. specify how the property is to be dealt with;
3. specify a person to administer the debt agreement on behalf of the debtor; and
4. specify how the person administering the debt agreement will be paid;

BANKRUPTCY ACT 1966 - SECTION 185C
Giving a debt agreement proposal to the Official Receiver
(1) A debtor may give the Official Receiver a written proposal for a debt agreement.
(2) A debt agreement proposal must:

(aa) be in the approved form; and
(a) identify the debtor's property that is to be dealt with under the agreement; and
(b) specify how the property is to be dealt with; and
(c) authorize a specified person (being the Official Trustee, a registered trustee or another person) to deal with the identified property in the way specified..

This section contains other conditions and should be read in full before completing any such proposal documents.

These documents are lodged with the ITSA. The debt agreement can contain an authority for the ITSA to delegate the duties of putting forward the proposal to creditors to a nominated person and, if accepted, to monitor the debtor's compliance with the debt agreement. This is extremely common.

BANKRUPTCY ACT 1966 - SECTION 185D
Statement of affairs to be given with a debt agreement proposal
(1) A debtor who gives the Official Receiver a debt agreement proposal must give the Official Receiver a statement of the debtor's affairs with the proposal.

The statement of affairs used or Part IX is different to the statement of affairs used in a bankrupt estate. Section 6A provides for the use of the specific statement of affairs

BANKRUPTCY ACT 1966 - SECT 6A
Statement of affairs for purposes other than Part XI
(1) This section has effect for the purposes of the following provisions of this Act, namely, subsections 54(1) and (2), paragraphs 55(2)(b), 56B(3)(a) and (b), 56F(1)(a) and (b), 57(2)(a) and (b) and sections 185D and Part X.

(2) A reference in a provision of this Act referred to in subsection (1) to a statement of affairs is a reference to a statement that:
(a) is in an approved form; and
(b) includes a statement identifying any creditor who is a related entity of the debtor or bankrupt; and
(c) contains a declaration that, so far as the debtor or bankrupt is aware, the particulars set out in the statement are correct.

Control over affairs

There is no control by the administrator over the affairs of the debtor during the period from signing the authority to the acceptance or rejection of the proposal. That is, there is no equivalent to the controlling trustee period under the Part X provisions. Any debt owed by the debtor is frozen during this period, to allow time for the proposal to be considered by creditors. But, secured creditors are not affected by the acceptance of a debt agreement.

If a proposal is accepted by creditors, all creditors with debts that would be provable in a bankruptcy are bound by it, irrespective of whether they voted in favor of accepting the agreement or not, or whether they voted at all. The terms of the agreement then come into effect. Control over the debtor's affairs after the proposal has been accepted is limited to control given to the debt agreement administrator given under the terms of the debt agreement. Any control is likely to be minimal.

BANKRUPTCY ACT 1966 - SECTION 185F
Effect of accepting a debt agreement proposal for processing
(1) After acceptance of a debt agreement proposal for processing is recorded in the National Personal Insolvency Index:
(a) a creditor cannot apply for enforcement of, or enforce, a remedy against the debtor's person or property in respect of a frozen debt; and
(b) a sheriff must not take action, or further action, to execute, or sell property under, any process issued by a court to enforce payment of a frozen debt owed by the debtor; and
(c) a person who is entitled under a law of the Commonwealth, or of a State or Territory of the Commonwealth, to retain or deduct money from money that is or will be owing or payable to the debtor must not retain or deduct money;

until any of the following events occurs:

(d) in a case where:
(i) the applicable deadline arrives; and
(ii) the proposal has not been accepted;
the arrival of the applicable deadline;

(e) in a case where:
(i) the proposal is accepted; and
(ii) the proposal is not expressed to be subject to the occurrence of a specified event within a specified period after the proposal is accepted; and
(iii) details of the debt agreement are entered on the National Personal Insolvency Index;
the entry of those details on the National Personal Insolvency Index;

(f) in the case where:
(i) the proposal is accepted; and
(ii) the proposal is expressed to be subject to the occurrence of a specified event within a specified period after the proposal is accepted; and
(iii) that event occurs within that period; and
(iv) details of the debt agreement are entered on the National Personal Insolvency Index;
the entry of those details on the National Personal Insolvency Index;

(g) in the case where:
(i) the proposal is accepted; and
(ii) the proposal is expressed to be subject to the occurrence of a specified event within a specified period after the proposal is accepted; and
(iii) that event does not occur within that period;
the end of that period;

(h) in a case where the Official Receiver cancels the acceptance of the proposal for processing--the cancellation of the acceptance;
(i) in a case where the proposal lapses--the lapse of the proposal.

A debt agreement proposal will lapse if no creditor responds and votes within the specified time period, or the debtor dies before the proposal is put into place.

BANKRUPTCY ACT 1966 - SECT 185G
Lapsing of a debt agreement proposal
A debt agreement proposal lapses if:
(b) the Official Receiver accepts the proposal for processing and writes to affected creditors about it, but no replies are received before the applicable deadline; or
(c) the debtor dies after giving the proposal to the Official Receiver but before a debt agreement is made on the basis of the proposal.

After the proposal has been accepted and the debt agreement is in force, creditors cannot take further action against the debtor or their property, and they cannot start fresh proceedings or present or further a creditor's petition. The debts remain frozen.

BANKRUPTCYACT 1966 - SECTION 185K
Prevention of proceedings relating to debts
(1) While a debt agreement is in force and details of it are entered on the National Personal Insolvency Index, a creditor cannot:
(a) present a creditor's petition against the debtor; or
(b) proceed further with a creditor's petition that was presented against the debtor before details of the debt agreement were entered in the Index; or
(c) enforce a remedy against the debtor's person or property, or start or take a fresh step in legal proceedings, in respect of a provable debt.

The exception to this rule is that a debt agreement will not bind any amount owing under a maintenance agreement or order, or an amount that is the proceeds of crime.

BANKRUPTCY ACT 1966 - SECTION 185K
Prevention of proceedings relating to debts
(2) Paragraph (1)(c) does not prevent a creditor from enforcing a remedy against the debtor or the debtor's property for a liability under one or more of the following:
(a) a maintenance agreement;
(b) a maintenance order;
(c) a proceeds of crime law.

Voting for the proposal

ITSA or the nominated person will prepare a report to creditors on the affairs of the debtor. The report will set out the proposal and compare the return under the debt agreement to the likely return if the debtor were made bankrupt. The report will call for a vote on the proposal.

BANKRUPTCY ACT 1966 - SECTION 185EA
Processing of debt agreement proposal
(1) If the Official Receiver is required by subsection 185E(5) to process a debt agreement proposal, the Official Receiver must write to each of the affected creditors who is known to the Official Receiver, asking each affected creditor to indicate whether the proposal should be accepted.

A debt agreement must be accepted by a majority in number and 75% in value of the creditors who participate in the vote. A meeting of creditors may be called, but it is more common that voting is done by mail. Creditors will have 25 working days after the official trustee accepts the proposal to lodge their vote for or against the proposal.

BANKRUPTCY ACT 1966 - SECTION 185EC
Acceptance of a debt agreement proposal
(1) A debt agreement proposal is accepted if:
(a) the Official Receiver writes to affected creditors of a debtor under section 185EA; and
(b) a majority in value of the creditors who reply before the applicable deadline state that the proposal should be accepted.

If accepted, the debt agreement will bind all creditors with provable debts that existed at the date of the acceptance of the proposal by the official trustee (not the later date of the acceptance of the proposal). A provable debt is one that could be proved in a bankruptcy estate of the debtor. This includes the debts of creditors who decided not to take part in the voting process.

When are dividends paid?

The debt agreement administrator will usually pay a dividend when all of the assets made available under the proposal have been realized, but may pay dividends at any time as long as this complies with the terms of the agreement. The frequency of dividends will depend on the provisions of the debt agreement and the practicality and commerciality of paying numerous dividends.

Breaches and Termination

A debtor's obligations under a debt agreement end when he or she fully satisfies the requirements of the agreement.

BANKRUPTCY ACT 1966 - SECT 185N
End of debt agreement on discharge of obligations under agreement
(1) A debt agreement ends when all the obligations that it created have been discharged, unless the agreement has been terminated earlier under section 185P, 185Q, 185QA or 185R.

If the terms of the agreement cannot be satisfied, the debtor or a creditor may apply for the agreement to be terminated. In practice, the trustee will allow the debtor some time to comply with the provisions of the agreement, but if they cannot do so, will suggest to the debtor and the creditors that the agreement should be ended.

BANKRUPTCY ACT 1966 - SECT 185P
Terminating a debt agreement by accepting a proposal
(1) The debtor (or the debtor's personal representative if the debtor has died) or a creditor who is bound by a debt agreement may give the Official Receiver a written proposal to terminate the agreement.
(1A) The proposal must be in the approved form.
(1B) A proposal must be accompanied by an explanatory statement in the approved form containing such information as the form requires.
(1C) The subsection (1B) statement may be set out in the same document as the proposal.
(2) The Official Receiver must process the proposal in accordance with section 185PA if the Official Receiver is satisfied that subsections (1A) and (1B) of this section have been complied with.
(3) The debt agreement is terminated when the proposal is accepted.

The procedure to propose a termination of a debt agreement is very similar to the procedure used to accept one. The Official receiver writes to all creditors and put forward the proposal to terminate.

BANKRUPTCY ACT 1966 - SECT 185PA
Procedures for dealing with proposals to terminate debt agreements
(1) If the Official Receiver is required by subsection 185P(2) to process a proposal to terminate a debt agreement, the Official Receiver must write to each of the affected creditors who is known to the Official Receiver, asking each affected creditor to indicate whether the proposal should be accepted.

(2) When writing to each affected creditor under subsection (1) about a proposal to terminate a debt agreement, the Official Receiver must:
(a) provide the creditor with a copy of:\

(i) the proposal; and
(ii) the relevant subsection 185P(1B) statement; and

(b) ask the creditor to give a written statement setting out whether or not the proposal should be accepted; and
(c) inform the creditor of the person to whom the statement should be given and of the need to give the statement before the applicable deadline.

(3) The paragraph (2)(b) statement must be in the approved form.

The proposal to terminate is accepted if the majority of creditors voting within the time period vote for the termination.

The debtor may incur more debts after the acceptance of the proposal by ITSA, and these debts are not included in the proposal. Therefore the debtor has no protection from these creditors. The debtor may be bankrupted by these later creditors if they do not meet these debts.

The agreement terminates if the debtor becomes a bankrupt under either a debtor's petition, or the debtor could become bankrupt as a result of the presentation of a petition against a partnership.

BANKRUPTCY ACT 1966 - SECT 185R
A debt agreement is terminated if the debtor becomes a bankrupt.

Alternatively a creditor may apply to the Court for an order terminating the debt agreement if:

(a) the creditor can show that the debtor has not carried out the terms of the debt agreement and that the termination is in the best interests of creditors;
(b) the continuation of the debt agreement would cause injustice or undue delay to the creditor; or
(c) for any other reason and it is in the creditor's interests.

BANKRUPTCY ACT 1966 - SECT 185Q
Terminating a debt agreement by order of the Court
Applying for an order
(1) Any of the following persons may apply to the Court for an order terminating a debt agreement:
(a) the debtor (or the debtor's personal representative if the debtor has died);
(b) a creditor of the debtor;
(c) the Official Receiver.

Release from obligation to creditors

On acceptance of the proposal, the debtor is released from all those debts that the debtors would normally be discharged from in a bankruptcy - called provable debts in a bankruptcy. The release from those debts is cancelled if the agreement is terminated or voided by the Court. Debts that are not provable in the estate (in a bankruptcy) will not be released.

BANKRUPTCY ACT 1966 - SECTION 185NA
Release of debtor from debts
(1) When a debt agreement ends under subsection 185N(1), the debtor is released from provable debts from which the debtor would have been released if the debtor had been discharged from bankruptcy immediately after the acceptance of the relevant debt agreement proposal for processing was recorded on the National Personal Insolvency Index.
(2) The release ceases to operate if the debt agreement is declared void by the Court.

The release only applies to debts owed by the debtor themselves and does not apply to anyone that entered into a debt jointly with the debtor, or guaranteed any of the debtor's debt. The other party remains liable for these debts in their own right.

BANKRUPTCY ACT 1966 - SECTION 185NA
Release of debtor from debts
(3) The release does not:
(a) release anyone else from a debt that he or she owes jointly with the debtor; or
(b) release a guarantor from the guarantee that the guarantor gave for the debtor's debt.

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: 18.6.2010