Part X Personal Insolvency Agreement (“PIA”)
Part X of the Bankruptcy Act 1966 (Cth) (“the Act”) offers an alternative to bankruptcy by providing a debtor in financial difficulty with a formal but expensive mechanism to reach a binding arrangement with his or her creditors. The arrangements are individually tailored to suit the debtor’s unique financial circumstances. The debtor is able to negotiate a settlement with creditors that most likely involves the payment of less than 100 cents in the dollar. Payments can be by lump sum and/or by instalments over a certain period of time and may involve the sale of property together with the contribution of regular payments.
The provisions of Part X are invoked by the debtor signing what is called a Section 188 Authority, authorising either a Registered Trustee, a Solicitor or the Official Trustee (who is then referred to as the Controlling Trustee) to call a meeting of his or her creditors and to take control of his or her property. At the same time, the debtor must provide the Controlling Trustee with a proposal, including a draft PIA, and a Statement of Affairs outlining all known assets and liabilities of the debtor. A PIA takes the form of a Deed and must include specified terms, including but not limited to the following:
- identifying the debtor’s property that is to be available to pay creditors’ claims and how it is to be dealt with (whether or not already owned by the debtor when the agreement is executed);
- identifying the debtor’s income that is to be available to pay creditors’ claims and how it is to be dealt with (whether or not already derived by the debtor when the agreement is executed);
- specifying the extent (if any) to which the debtor is to be released from his or her provable debts;
- specifying the conditions (if any) for the agreement to come into operation and the circumstances in which, or the events on which, the agreement terminates;
- specifying the order in which proceeds of realising the property and/or income referred to in the agreement are to be distributed among creditors;
- specifying whether or not the antecedent transaction provisions of the Act apply to the debtor. That is, whether or not the Controlling Trustee can pursue for the benefit of creditors any transactions that have occurred prior to the day the agreement was executed;
- making the provision for a nominated person or persons to be trustee or trustees of the agreement; and
- providing that the debtor will execute such instruments and generally do all such acts and things in relation to his or her property and income as is required by the agreement.
The effect of appointing a Controlling Trustee is that creditors are unable to commence or continue any further action for the recovery of their debts from the debtor until the outcome of a subsequent meeting of creditors is known.
In this regard, the meeting must be held within 25 working days of appointment or within 30 days if the appointment is made in December.
The Controlling Trustee immediately takes control of the debtor’s property and undertakes certain investigations into the affairs of the debtor. In addition, the Controlling Trustee is required to issue a report to creditors regarding the findings of his investigations. This report is also required to contain a statement as to whether or not the PIA proposal is in the best interests of creditors. At the meeting convened to consider the proposal, creditors may resolve that the debtor be required to execute a PIA. The resolution will be carried if the majority in number AND 75% in value of creditors present at the meeting vote in favour of the PIA. In the event that the proposal for the PIA is not accepted by creditors then the most common outcome is for creditors to resolve that the debtor files for bankruptcy.
Creditors, whether they voted in favour of the PIA or not, are bound by the terms of the PIA and cannot take any action to recover their debts outside the PIA. Once all the terms of the PIA are fulfilled, the PIA is terminated. If the debtor defaults on the terms of the PIA, the Trustee may terminate the PIA or creditors may at a meeting of creditors resolve to terminate the PIA. In addition and in specific circumstances, a Court, may on the application of the Trustee, a creditor or the debtor, terminate the PIA. If a PIA is terminated by way of debtor default, then it is most likely that the debtor will become bankrupt.
A PIA may subsequently be varied, after receiving the consent of the debtor, by a special resolution of creditors at a meeting called for this purpose or by the Controlling Trustee writing to creditors. A PIA does not normally affect a secured creditor’s rights or releases a partner or joint debtor or a guarantor from any surety given in respect to the debtor.
The advantages of entering into a PIA can be summarised as follows:
- the appointment of a Controlling Trustee provides immediate independent control of the debtor’s property and affairs;
- the Controlling Trustee provides independent advice on the affairs of the debtor and the merits of the debtor’s proposal;
- the debtor avoids the stigma of bankruptcy;
- a PIA provides for the flexible administration of the debtor’s affairs including the opportunity to carry on business, which is difficult for an undischarged bankrupt;
- the opportunity exists to obtain assets which are not available under bankruptcy;
- the execution of a PIA avoids Court process;
- subject to the terms of the PIA, there is no requirement to contribute after acquired property.
As indicated above, the costs of a PIA can be prohibitive and accordingly, it will not be an appropriate alternative for debtors with no resources or access to limited resources.
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.