By Liam Bailey, Managing Partner, O’Brien Palmer
I recently acted as controlling trustee in a matter where a company director successfully proposed a Personal Insolvency Agreement and avoided bankruptcy. The case highlights an increasingly common issue: restructuring a company’s debts does not necessarily resolve the director’s personal liabilities.
The director’s company had completed a Small Business Restructuring through another firm. Creditors accepted a proposal that returned approximately 22 cents in the dollar on around $200,000 of company debt.
However, before the restructure began, the ATO had issued the director with a lockdown Director Penalty Notice. The company’s tax debt was compromised through the restructure, but the director remained personally liable for approximately $100,000.
Even though the company had successfully restructured, the director was still personally exposed to a substantial tax debt.
Considering a Personal Insolvency Agreement
The director approached O’Brien Palmer to determine whether a Personal Insolvency Agreement, or PIA, could provide an alternative to bankruptcy.
A PIA is a formal arrangement under the Bankruptcy Act 1966. A controlling trustee investigates the debtor’s financial position, reports to creditors and convenes a meeting where creditors decide whether to accept the proposal. In this matter, the ATO was the creditor that would effectively determine the outcome.
The director proposed a return of approximately 17 cents in the dollar, funded through loans and assistance from family members and other third parties.
At the creditors’ meeting, the ATO questioned whether the proposal represented the director’s best possible offer. It also examined the likely return it would receive if the director instead became bankrupt.
Evidence and cooperation were critical
OBP’s role was to compare the proposed PIA with the likely bankruptcy outcome.
This involved reviewing:
- the director’s assets and secured liabilities;
- the value of any available equity;
- the director’s income;
- possible income contributions during bankruptcy; and
- the likely costs and returns under each option.
The director cooperated fully and provided the records required to support the proposal. This was important because creditors need confidence that a debtor has disclosed their full financial position and that the proposed return is properly supported.
The ATO also indicated that proposals involving unpaid employee superannuation may receive greater scrutiny. This reflects its stated focus on protecting employee entitlements and addressing poor compliance.
Why the proposal was accepted
The ATO ultimately supported the Personal Insolvency Agreement. The proposal provided a meaningful return, was supported by evidence and represented the maximum amount the director could realistically raise. It also compared favourably with the likely outcome in bankruptcy.
There is no guaranteed return that will secure creditor approval. Each proposal is assessed on its own facts, including the debtor’s conduct, available assets, income and level of disclosure.
A Personal Insolvency Agreement is not about avoiding responsibility. It is about putting forward the best genuine offer available.
Company and personal recovery must be considered together
This case demonstrates why directors need to consider both the company’s financial position and their own.
Even where a business can be successfully restructured, directors may remain exposed through:
- Director Penalty Notices;
- personal guarantees;
- finance agreements; or
- claims arising from the company’s failure.
A Personal Insolvency Agreement will not be suitable in every case, but it should be considered before bankruptcy where there is a credible proposal that may deliver creditors a better outcome.
If your company has restructured but you remain personally liable for its debts, early advice is essential. O’Brien Palmer can assess the likely outcomes of bankruptcy and compare them with the prospects of a Personal Insolvency Agreement.
Liam Bailey, Managing Partner
O’Brien Palmer
📞 (61) 2 9232 3322
📧 obp1@obp.com.au
This article contains general information only and should not be relied upon as legal or financial advice.