How to Give Your Part 10 Agreement the Best Chance of Success
A Part 10 Agreement, formally known as a Personal Insolvency Agreement, can be a powerful alternative to bankruptcy. But it is not a magic fix. For creditors to support it, the proposal needs to be honest, commercially sensible and clearly better than the likely outcome in bankruptcy.
In this video, Adrian Franco, Manager at O’Brien Palmer, explains how debtors can give themselves the best chance of having a Part 10 Agreement accepted by creditors.
What is a Part 10 Agreement?
A Part 10 Agreement is an offer put forward to creditors before bankruptcy. It gives creditors the opportunity to vote on whether they will accept a compromise, usually a cents-in-the-dollar return, rather than forcing the debtor into bankruptcy.
As Adrian explains, the purpose is to give creditors a better outcome than they would ordinarily receive in bankruptcy, while allowing the debtor to move forward without the stigma and consequences of bankruptcy.
This option is becoming more common.
Recent statistics released by AFSA showed that more than 210 Part 10 Agreements were put forward in the last financial year, compared with 163 in the previous financial year, an increase of around 29%.
With that increase, AFSA is paying closer attention. Adrian notes that AFSA is now focusing on whether debtors and trustees are complying with their duties, and whether the Part 10 process is being used properly.
TIP 1. Be upfront from the beginning
The first rule is simple:
- Do not hide anything.
- When speaking with a trustee, debtors need to disclose all relevant information about their financial position.
Every trustee will undertake investigations. If something is being hidden, there is a strong chance it will be found.
Being upfront helps the trustee properly investigate, report to creditors and put forward accurate information. It also helps creditors make an informed decision about whether to support the proposal.
False or misleading information can create serious compliance issues, including potential prosecution by AFSA.
TIP 2. Offer a reasonable return
Creditors need a reason to vote yes. That usually means the offer must be clearly better than what they would receive in bankruptcy.
Adrian explains that in recent O’Brien Palmer matters, successful Part 10 Agreements have often involved returns in excess of 10 cents in the dollar, with strong results from statutory creditors, banks and trade creditors.
The key is not just offering something. It is offering enough to make the proposal commercially worthwhile.
If the difference between the Part 10 offer and bankruptcy is only a few cents, creditors may decide they would rather see the debtor become bankrupt.
TIP 3. Think about the creditors’ interests
A successful Part 10 Agreement is not just about the debtor avoiding bankruptcy. It must also make sense for creditors.
Debtors should consider whether the proposal is in creditors’ best interests, including whether it creates a better financial outcome and whether it supports future commercial relationships.
This can be particularly important where trade creditors may be suppliers the debtor hopes to continue working with. A fair proposal can help preserve relationships, and an unrealistic proposal may damage them further.
TIP 4. Have the funds ready
One of the strongest ways to improve the chances of success is to have the money ready.
Adrian explains that where funds are available from day one and can be held in trust, the trustee can tell creditors that payment can be made quickly if the agreement is approved.
That certainty matters. Creditors may be less likely to support proposals that rely on extended payment plans over 12, 18 or 24 months, or on the sale of a third-party asset that may or may not occur.
TIP 5. Act early
Timing matters. If a debtor can see that a Part 10 Agreement may be needed, they should seek advice early. Acting proactively can avoid creditors spending time and money pursuing bankruptcy proceedings.
It may also help preserve goodwill. A creditor who has not been forced to spend unnecessary time and money may be more likely to consider the proposal positively.
What separates success from failure?
O’Brien Palmer has recently seen both successful and unsuccessful Part 10 agreements.
The successful matters had common features:
- The debtors were compliant and helpful from day one.
- They provided information promptly.
- The trustee was able to prepare detailed reports.
- Creditors had enough information to make an informed decision.
- The returns were clearly better than bankruptcy.
In unsuccessful matters, Adrian says the problems were often the opposite: delays, lack of compliance, incomplete information and low returns, sometimes less than four cents in the dollar.
A Part 10 Agreement can help a debtor avoid bankruptcy, reduce the stigma attached to bankruptcy and move out of financial difficulty sooner. But it needs to be done properly.
That means being honest, organised, realistic and proactive.
When the proposal is strong and the debtor’s conduct supports it, creditors are more likely to consider it seriously. And when it works, it can give a person the opportunity to move forward, restart their life or business, and leave the financial burden behind.
If you have a matter that you would like to speak to Adrian, myself or the team at O’Brien Palmer, please reach out and we can speak confidentially and without obligation. We are always here to help.
LIAM BAILEY, MANAGING PARTNER
O’BRIEN PALMER
📞 (61) 2 9232 3322
📧 obp1@obp.com.au
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