Personal Insolvency Arrangement – A Bankruptcy Alternative

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By Liyan Tay and Connie Tam 

If you have found yourself in a bit of a financial pickle and are considering filing for bankruptcy it would be prudent to attempt to explore all your options first.  Bankruptcy is an appropriate solution for some but it should be a last resort.

This article will summarise the Part X process of the Bankruptcy Act 1966 which governs personal insolvency agreements (“PIA”) as an alternative to bankruptcy.

In a nutshell the PIA process provides an opportunity for a debtor to make a proposal to creditors to settle debts without becoming bankrupt.  A debtor should be in a position to offer creditors some assets or funds in satisfaction of their debts which would result in creditors receiving more than they would if the debtor went bankrupt.

Usually the proposal provides for a sum of monies to be paid over time, sale of some assets or contributions from a third party.  Creditors’ claims against the debtor throughout the term of the PIA will be suspended and creditors will usually receive payment of less than the full amount in full satisfaction of their claims.

How the process starts

The debtor must appoint a Registered Trustee, AFSA or a solicitor to be the Controlling Trustee.  Upon appointment the Controlling Trustee will have control over the debtor’s assets.

The Controlling Trustee will then conduct an investigation into the debtor’s examinable affairs, prepare a report to creditors summarising the debtor’s examinable affairs, make a recommendation on the debtor’s PIA proposal then call a meeting of creditors to consider the debtor’s proposal.

During the creditors’ meeting creditors will vote on whether to accept or reject the debtor’s proposal.  This is a creditor driven process to be decided by creditors only.  In order for the PIA proposal to be passed a special solution is required whereby the majority in number of creditors and more than 75% in value of creditors attending and voting must vote in favour of the proposal.

Advantages of a PIA are:

  • less social stress and detriment to the debtor;
  • flexibility for a debtor in tailoring a suitable proposal to account for the debtor’s personal circumstance and financial ability. A debtor can include or exclude particular assets which are to be made available to the creditors;
  • generally higher return to creditors compared to bankruptcy;
  • a debtor will usually be more cooperative with the Trustee;
  • all creditors of the debtor’s estate will be bound by the terms of the PIA including those who rejected the proposal;
  • timing of dividend is usually shorter and known to creditors of a PIA; and
  • the creditor’s petition will be stayed unless a leave is obtained from the Court.

Disadvantages of a PIA are:

  • it is an act of bankruptcy to sign an authority to appoint a Controlling Trustee; and
  • a debtor is disqualified from acting as director once a PIA is executed. This restriction is lifted once the PIA terms have been complied with.

Once the PIA is accepted the Trustee will enforce the terms of the PIA, sell any assets, collect funds from the debtor and declare a dividend to creditors.  The PIA will end when all the terms and obligations of the PIA have been satisfied and a dividend is distributed to creditors.

Want to know more?

If you would like to know more about personal insolvency arrangements, please contact Insolvency & Reconstruction Senior Manager Liyan Tay for assistance.

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.

 

 

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