Part X Bankruptcy Act

Part X Bankruptcy ActPart X Bankruptcy Act allows a debtor to escape bankruptcy by entering an arrangement to satisfy their debts owed with their creditors. The arrangement is called the personal insolvency agreement.

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 X Bankruptcy Act debt agreement will still be noted by credit agencies.

Starting the Part X Bankruptcy Act Process

The debtor chooses a controlling trustee and provides them with:

  1. A Section 188 Authority which gives the trustee control over assets and the requirement to call a meeting of creditors to elect the proposal
  2. A statement of affairs
  3. A draft personal insolvency agreement detailing the terms of the proposal

The controlling trustee then signs a consent to act and the documentation is sent to the AFSA (Australian Financial Security Authority) to be registered.

What is a Personal Insolvency Agreement

The Part X Bankruptcy Act agreement is executed in the form of a deed once the creditors have consented to the proposed terms. The proposal contains lawful terms which detail how the debtor will satisfy their debts. A personal insolvency agreement usually provides for periodic payments, the sale of assets, and the acceptance of a sum less than the full amount.

Accepting the Part X Bankruptcy Act proposal

Within 21 days following the appointment of the trustee a creditors meeting must be called. In order for the proposal to be accepted a majority in number and more than 75% majority in value must attend and affirm the proposal. This is referred to as a special resolution.

Signing section 188 equates to an act of bankruptcy

By pursuing Part X Bankruptcy Act a debtor in effects commits several acts of bankruptcy, including signing the section 188 authority. These acts can be used by creditors where the proposal is rejected to apply to the court for bankruptcy of the debtor.

The personal Insolvency Agreement effect on creditors;

  1. Secured creditors
  2. The right of secured creditors under their security remains untouched and their rights ensue regardless of whether the proposal is accepted or rejected.
  3. Unsecured creditors
  4. Upon acceptance all unsecured creditors are bound by the agreement, regardless of whether or not they voted at all or in its dissent.

Effect on the debtor’s property and income

Only where the property is provided for in the agreement will it be affected, and such affect will be in accordance with the terms of the agreement. Property or income that is not provided for in the proposal will not be affected by the Debt Agreement if accepted.

Can the trustee pay dividends

The trustee makes distributions which comply with the terms set out in the agreement. When distributions are paid will depends on; when the funds become available and the duration of the agreement.

When does the agreement end?

The Part X Bankruptcy Act agreement will end upon the debtor satisfying its requirements and the funds have been distributed, or through termination.

Termination will result from a failure to fulfill the terms of the agreement. The debtor is provided with the opportunity to rectify the default upon receiving a default notice, however if not rectified the agreement may be terminated. Termination can occur through a provision which automatically terminates it upon default, the trustee terminating with the creditors consent, passing a special resolution among creditors, or via application to the Court.

Who administers the agreement

The proposal must provide for the appointment of a registered trustee or the official receiver who is to administer the agreement. The trustee derives their power and obligation from a the terms of the Part X Bankruptcy Act agreement and the Federal Bankruptcy Act, but in essence they are to enforce the agreement, sell assets, collect money and make distributions.

Can a debtor continue to act as a director of a company?

While the personal insolvency agreement is on foot a debtor cannot continue to act as a director, however, once the agreement has ended there is no further restriction.

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