This provision of the Bankruptcy Act allows a debtor to escape bankruptcy by entering an agreement to satisfy their debts owed with their creditors.
As bankruptcy places restrictions on a debtor this alternative is usually implemented to maintain their source of income and ensure a controlled distribution of funds amongst their creditors.
Creditors also receive the advantage of receiving a higher dividend than would be the case if bankruptcy were pursued.
Although viewed more favourably than bankruptcy, the fact that a debtor has entered into a Part 9 Debt Agreement will still be noted by credit agencies.
Who can propose a Debt Agreement?
The application of a Debt Agreement Between Two Parties as per Part IX is restricted to debtors who have not;
- been bankrupt before;
- been party to another debtor agreement before.
- been a debtor under Part X of the Bankruptcy Act in the 10 years proceeding.
- the debtors income, after tax, must be below the threshold;
- unsecured creditors must not exceed the prescribed amount.
- the debtors divisible property must not exceed the prescribed amount.
How the process is started?
A Part IX Statement of Affairs and a Debt Agreement proposal must be completed by the debtor which:
- identifies the property/funds which will be made available to creditors
- specified how such assets are to be sold or transferred
- specifies a person to administer the agreement
- specified how said person will be paid
These documents are then lodged with the Australian Financial Security Authority (AFSA).
Proposals to Creditors
Proposals can allow for:
- payment from the debtors income;
- payment in a lump sum from the debtor or a third party.
- a payment of an amount less than the full amount but provided in full satisfaction.
- periodic payments;
- the sale of property or assets;
- the transfer of specific property.
- any combination of the above.
Property or income that is not provided for in the proposal will not be affected by the Debt Agreement if accepted.
Acceptance of the Proposal
After the proposal and statement have been lodged the receiver will provide a report the creditors setting out the terms and highlighting the variance between the return expected under the proposal to that to be expected under bankruptcy. Creditors then have 25 working days, from the date that AFSA accepts the proposal, to vote. The proposal is then only accepted if there is a majority in value vote.
If accepted all creditors, even those who did not vote or who voted against, are bound with debts in existence at the date of acceptance. Upon acceptance a debtor is released from the same debts that would be released in a bankruptcy. Therefore, the rights of secured creditors under their securities remain intact.
Rejecting the proposal
If rejected or unfulfilled a creditor may proceed to file a creditors petition to have the debtor declared bankrupt.
Powers of the debt administrator
It is the duty of the debt administrator to enforce the terms of the agreement and distribute to creditors accordingly. Part IX sets out the powers and obligations for debt administrators.
If the administrator fails to satisfy the terms of the debt agreement the position of all creditors will be reinstated, terminating the agreement. A debt administrator has a duty to inform creditors of any default, leading to the opportunity to terminate, or a creditor can apply to the Court for termination.
When does a debt agreement end?
A debt agreement ends once the obligations set out within are satisfied or upon termination as a result of breach.
As mentioned there are fees paid to the administrator for performing their function which are set out in the agreement. The administration also attracts a government charge, the Government Realization Charge. This charge is payable in priority to any dividend to creditors.