The recent judgment of Whimp v the OA as liquidator of Roseneath Developments Limited (In Liquidation), Associate Judge Christiansen, provides a comprehensive summary of the court’s jurisdiction to refuse a debtor’s proposal under Part XV of the Insolvency Act.
Mr Whimp worked in the building industry and got himself into financial difficulties. Mr Whimp attempted to avoid bankruptcy by seeking the approval of a debtor’s proposal under Part XV of the Insolvency Act.
Mr Whimp had debts of $303,000 and proposed payment of 30 cents in the dollar to his unsecured creditors. The source of the funds was to come from his brother, who was also to act as provisional trustee. On a vote of creditors, four were in favour three were against the proposal.
Mr Whimp sought the High Court’s approval which was challenged by some disgruntled creditors.
The Court’s Powers Under The Insolvency Act
Even if a debtor’s proposal is accepted by creditors, to be enforceable the High Court must approve it. Once it is approved, it is enforceable against all creditors, even those who were not in favour.
The Act has not been complied with.
The terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors.
It is not expedient that the proposal be approved.
The court has the power to either approve or reject a proposal. The court has no power to alter the substance of a proposal.
The Relevant Factors
His Honour did not dwell too long on the first two grounds, quickly finding that there had been no procedural error, and that the proposal was, on its face, reasonable.
In considering the expediency ground, His Honour comprehensively reviewed previous cases which weighed the following factors:
The debtor’s conduct (whether the debtor’s conduct is so irresponsible that the court should conclude that it is in the public interest that the debtor should not escape the stigma of bankruptcy).
Whether the proposal was not expedient for reasons of policy (which involves a consideration of how the debts were incurred).
The size of the debtor’s debts.
The extent of the debtor’s assets.
Voting of ‘friendly creditors’.
Factors supporting approval of the proposal.
His Honour noted that the courts generally accept the views of the majority of creditors, unless it is apparent that one of the grounds for refusing the proposal exists.
After careful consideration of the above factors, Associate Judge Christiansen approved the proposal for the following reasons:
The debt ($303,000) owing by Mr Whimp was comparatively small.
There was no mystery as to how the debts were incurred.
Mr Whimp and his brother had already attracted public attention for their activities and to that extent and had to carry the stigma (closely associated with bankruptcy).
The proposal was better than what the creditors would receive on bankruptcy.
The case is interesting because it provides a comprehensive review of the above factors that the court takes into account when considering whether to approve a debtor’s proposal.
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.
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As a demonstration of India's combined political will, the much awaited and debated Insolvency and Bankruptcy Code, 2016 was passed by the Upper House of the Parliament on 11 May 2016 (shortly after being passed by the Lower House on 5 May 2016).
The Government has formulated a plan to refurbish the prevailing bankruptcy laws and replace them with one that will facilitate stress-free and time-bound closure of businesses.
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