How do I get out of this?

By Steven Staatz & Robert Talbot 

Quite often we are asked by individuals who have been forced into bankruptcy, “how do I get out of this?”  Once a person is made bankrupt by a court order or upon their debtor’s petition, there are three options to “get out of bankruptcy”.  These options are:

1. annulment if the trustee is satisfied that a bankrupt may have sufficient assets in his/her estate to payout his/her creditors in full (inclusive of interest and the bankruptcy trustee’s costs of administering the estate) pursuant to section 153A of the Bankruptcy Act 1966 (“the Act”);
2. annulment by court order, where the court is satisfied that the bankruptcy ought not to have occurred (section 153B(1) of the Act); and
3. annulment upon the acceptance by creditors’ special resolution of a scheme of arrangement or composition by the bankrupt (section 74 of the Act).

Generally, annulment restores the bankrupt to his or her original status effectively setting aside the bankruptcy.

In most instances of bankruptcy, having sufficient assets in the estate or making an application to court may not be viable options.  However, for a bankrupt that can seek assistance from a family member or third party, they may be in a position to seek an annulment of their bankruptcy by way of a proposal put to the bankrupt’s creditors.  Ultimately, the creditors of the estate will decide whether to accept or reject the proposal at a meeting called by the bankruptcy trustee.

A bankrupt can put forward a composition or scheme of arrangement proposal (‘the proposal”) pursuant to section 73 of the Act.  A composition comprises of a monetary contribution whilst a scheme of arrangement can include a broad spectrum of arrangements which may entail any combination of pledges, contributions of non-divisible property, third party assets/funds to the estate and/or transfer of creditors from the estate in exchange for an annulment of his/her bankruptcy.

Essentially, the proposal must contain the terms of the offer and also include a provision for the trustee’s fees and expenses and a provision for the statutory asset realisation charge (currently 7%).

The bankruptcy trustee will call a meeting of creditors to consider the proposal.  In the lead up to the meeting, the bankruptcy trustee will essentially prepare and issue to all creditors a detailed report outlining the terms of the proposal and the estimated return under the proposal as compared to the estimated return if the bankruptcy were to continue.

At the meeting, creditors will vote on the acceptance of the proposal at which point:

• if accepted, the bankrupt will receive an annulment of his or her bankruptcy and all parties (including creditors that did not vote in favour of the proposal) are bound by the terms of the proposal; or
• if not accepted, the bankruptcy will continue.

Secured creditors rights to recover and realise an asset of the estate the subject of their security interest are not affected by the acceptance of the proposal.

This process creates opportunities for creditors to receive a better return than if the bankruptcy were to continue.  Dependent on the proposal, the return to creditors may be provided in a shorter period than otherwise would be in a bankruptcy.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.