Part IX Debt Agreement

Part IX Debt Agreement

Part IX of the Bankruptcy Act 1966 (Cth) provides another alternative to bankruptcy by providing debtors with an inexpensive mechanism to reach a binding arrangement with their creditors to release the debtor from his or her debts. This part of the Act is only available to be utilised by those debtors who:

  • have not, within the previous ten (10) years, been bankrupt, a party to a debt agreement or given an authority under Section 188 of the Act;
  • have unsecured debts that are below the specified threshold amount;
  • have property, which would be divisible among creditors in a bankruptcy, that is below the threshold amount;
  • have after tax income that is below the adjusted threshold amount in the year beginning at the proposal time.

The effect of the foregoing is that Debt Agreements are only available to debtors who have a relatively low income, minimal assets and low debt levels.

To initiate a Debt Agreement, a debtor must give the Official Receiver a proposal for a binding agreement between the debtor and his or her creditors. Any Debt Agreement proposal must identify the property to be dealt with under the agreement, specify how it is to be dealt with and authorise the Official Receiver, a registered Trustee, or another person, to deal with the property as specified.

The proposal must be accompanied by a statement of the debtor’s affairs. If the proposal is accepted by the Official Receiver, the Official Receiver must write to creditors informing them of the proposal, provide creditors with a summary of the debtor’s statement of affairs and ask them whether it should be accepted or whether a meeting of creditors should be called. If the agreement does not specify how the property is to be distributed, it must be distributed in proportion to provable debts. This provision only applies if there are insufficient funds to pay creditors in full.

A Debt Agreement comes into force when the debtor’s proposal is accepted by the creditors. In the event that the proposal is processed by the holding of a creditors’ meeting, the proposal is accepted by creditors passing a special resolution (majority in number AND at least 75% in value of creditors present and voting). If the proposal is processed by the Official Receiver writing to creditors, then the proposal is accepted if creditors constituting a majority in number AND at least 75% in value of those creditors who reply before the deadline (25 working days after acceptance of the proposal) stating that the proposal should be accepted.

If creditors approve the Debt Agreement, then the debtor is released from all debts which would be provable in a bankruptcy. However, this release ceases to operate if the Debt Agreement is terminated by the debtor or creditors, or if the Debt Agreement is declared void by the Court. A Debt Agreement does not affect a secured creditor’s rights or release a guarantor from any guarantee given in respect to the debtor. A Debt Agreement may subsequently be varied by the consent of the parties and ends when all the obligations it created have been discharged.

The above information is by necessity, general in nature and its brevity could lead to misunderstanding. For further information, you are invited to contact O’Brien Palmer.

O’Brien Palmer