Changing the trajectory for financial wellbeing.
People commonly misconceive that once bankrupt, there is nothing more they can do about their financial lives until they have been discharged from bankruptcy three years later. However, there are mechanisms to change the trajectory for increased financial wellbeing.
Bankrupts can potentially annul their bankruptcy by making a section 73 proposal to their estate's creditors under section 74 of the Bankruptcy Act. In the 2018-19 financial year, 185 section 73 proposals were accepted by creditors, which accounted for 20 percent of all bankruptcy annulment types.
The proposals can be formed on two different arrangements:
- A composition-payments over a set period.
- A scheme of arrangement-any other form of legal arrangement.
And these can be proposed to creditors at any point in the bankruptcy.
The process is quite straight forward. The bankrupt sets out their proposal in writing and the bankruptcy trustee examines it, calls a meeting of the bankrupt's creditors and recommends whether it should be accepted or not when compared against the likely return from a continued bankruptcy. Ultimately, creditors decide whether to accept the proposal or not. Acceptance must be made by special resolution-over 75% of the creditors voting in value and 50% of the creditors in number.
So, why would creditors entertain such a proposal from a bankrupt? To get a higher return on their debts being repaid when compared to the continued bankruptcy. Usually these proposals are made once the likely realisations from the bankrupt's assets and income contributions are known. Both the bankruptcy trustee and creditors will know what the estimated rate of dividend is, otherwise, the bankruptcy trustee would be unable to make a recommendation to creditors to accept or reject the bankrupt's section 73 proposal. Creditors can then decide if the proposal makes commercial sense to them.
What are the legal and practical differences between a section 73 agreement and bankruptcy?
An annulment is an effective undoing of the bankruptcy. An annulment is different (and better for the bankrupt) than discharge from bankruptcy at the end of the statutory three-year period, which is just an ending of the legal process and the restrictions placed on the bankrupt. Also, in most circumstances, they will not be an ex-bankrupt in the eyes of the law.
People under a section 73 agreement (ex-bankrupts) are still subject to the proposal provisions as accepted by their creditors and can be re-bankrupted if they breach the agreement, but many restrictions placed upon bankrupts will no longer apply. These include:
- Becoming free to travel overseas without permission.
- No longer making contributions from their income under the threshold test (other than what's outlined in the agreement).
- Becoming able to incur credit without disclosing a bankrupt status.
However, the following aspects still apply to both appointment types:
- The insolvency appointment is recorded forever on the National Personal Insolvency Index (NPII), which is the national and public register. If the section 73 proposal is accepted, the status shown on the NPII is "annulled". Whereas a bankruptcy will show "bankrupt" or "discharged bankrupt".
- The government realisation charge (currently seven percent) of all gross monies received into the administration, less payments to secured creditors, applies to both bankruptcies and section 73 agreements. Creditors in both appointment scenarios will be equally impacted by this charge.
- Bankruptcies appear on credit rating reports for five years. However, a section 73 agreement may restore a credit rating to the pre-bankruptcy position. (Credit reporting agencies apply discretionary approaches to what impacts/influences a credit rating).
Naturally, bankrupts propose section 73 arrangements to be released from their debts. Interestingly, the Bankruptcy Act does not automatically release debtors from their debts under section 73 agreements, and as the bankruptcy has been annulled there is no discharge process to trigger the release of debts after the bankruptcy. Therefore, special provisions in the proposal must specify the release of debts, otherwise the debtor (ex-bankrupt) would once again be liable for those debts (in part or full) once the section 73 arrangement ends.
It is important that these provisions are included and made known to creditors. This is where qualified and regulated advice is critical. Pre-insolvency advisors and debt agreements administrators have been under fire and reform in recent years due to debtors and creditors being disadvantaged.
1As found in the The Worrells Insolvency Report 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.