Section 73 Proposal

section 73 proposalWhat is a section 73 proposal?  During bankruptcy a bankrupt may find themselves in a position to make a section 73 proposal to creditors to satisfy their debt and terminate their bankruptcy.  Section 73 sets out the mechanisms to make such proposal.

The advantage in this for creditors is that they can expect to receive a larger distribution than they would in bankruptcy. The bankrupt also benefits by being released from the restrictions of bankruptcy.

How do bankrupts make a section 73 proposal?

A section 73 proposal is made by requesting, in writing, that their trustee call a meeting of creditors to consider the section 73 proposal. The trustee will then undertake investigations where necessary to determine the benefits that the proposal presents issue a report and call the meeting of creditors to vote on the proposal. The trustee is usually compensated for this work by the bankrupt.

If accepted, the bankruptcy will be annulled as at the time of acceptance. If rejected, the bankruptcy will continue.

Composition or a ‘scheme of Arrangement’

Under section 73 a proposal can either be a composition or a scheme of arrangement.

A composition is an agreement where any amount of money is to be paid to the trustee over any period of time. A scheme of arrangement on the other hand can contain nearly any lawful provision. Such provisions include; payment of money, sale of assets, payment from third party, or any combination of these.

section 73 proposal in Australia

Investigating and reporting

Upon receiving the section 73 proposal the trustee will conduct investigations and present its findings in a report to creditors. The report will compare the expected return under the proposal in contrast with the returns expected under bankruptcy.

Delays in calling a meeting of creditors

A trustee can delay or refuse calling the meeting of creditors if the proposal does not provide for payment of the trustees fees and outlays. The bankrupt may also be required to pay a surety before the proposal is examined to ensure that the trustee is paid for investigating the proposal and calling and holding the meeting.

How is the section 73 proposal accepted?

At the meeting attending creditors will vote on the proposal. For the proposal to be accepted at least 75% of the debts dollar value must be present and voting, of which a majority number is required.

If accepted the bankruptcy is annulled and the debtor will be bound by the terms outlined in the agreement. The agreement will also bind all creditors irrespective of whether they attended or voted. If defeated, the bankruptcy will continue as before.

Who administers a section 73 proposal?

The proposal is usually administered by the trustee of the bankrupt estate, however, a new trustee can be appointed. The proposal will include a provision for a trustee to administer the agreement. The trustee ensures that the terms of the agreement are compiled with, enforces the provisions where necessary and pays dividends to creditors.

What about the acts of the previous bankruptcy trustee?

Pursuant to section 74 of the Bankruptcy Act any acts by the bankruptcy trustee made during bankruptcy remain valid. This provision operates to ensure that the bankruptcy trustee’s actions cannot be challenged on the ground of validity.

Can the trustee pay dividends?

It is the role of the trustee to make distributions in accordance with the agreement, or where not provided where practical. What is practical is determined with regard to the amount of money available and the duration of the agreement remaining.

When does a section 73 agreement end?

The agreement ends once the debtor has fully satisfied the requirements of the agreement.

What if the debtor defaults?

If a debtor does not comply with the terms of the agreement the enforcement provisions in section 76B may come into operation. The trustee is able to terminate the agreement: automatically through its terms, with the consent of creditors, by resolution of creditors, or by Court Order. Applying to the Court to terminate the agreement can simultaneously seek to bankrupt the debtor again, starting a new bankruptcy.

Government Realization Charge

Administration of the proposal attracts a government charge, the ‘Asset Realisation Charge’, which is payable in priority to any dividend to creditors.

section 73 proposal in Australia

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