The Australian Financial Security Authority (ASFA) has published data that suggests an encouraging annual decrease in personal insolvencies, despite cost of living pressures. Ramsden Lawyers’ Senior Associate, Lachlan Boyle, and Law Clerk, Riley Hickey, explain how a  Section 73 Proposal may be your solution if you have recently found yourself experiencing the unfortunate burden of bankruptcy, and wish to have your bankruptcy annulled. 

BANKRUPTCY OVERVIEW

Bankruptcy is a legal procedure initiated when an individual is declared to be unable to repay their outstanding debts and other financial obligations. The bankruptcy period will typically last three years unless it is discharged or annulled. Discharge from bankruptcy typically occurs automatically at the conclusion of the period, provided no objection is lodged. Alternatively, the bankruptcy may be annulled at any time during the bankruptcy period.

ANNULMENT OF BANKRUPTCY

Bankruptcy may be annulled through three mechanisms, namely:

a)     a proposal initiated under section 73 of the Bankruptcy Act 1966 (Cth) (‘Act’)

b)     by satisfying the bankrupt’s outstanding debts and obligations in full; or alternatively

c)      at the discretion of the Court

SECTION 73 PROPOSAL

A Section 73 Proposal (‘Proposal’) is an under-utilised but incredibly beneficial annulment tool, where the bankrupt may put forward a Proposal to their creditors in exchange for the full and final satisfaction of any outstanding debts and obligations pursuant to the bankruptcy.

The Proposal can take various forms but has commonly included:

a)    a lump sum payment to the creditors

b)    a series of instalments paid to creditors

c)    an express indication of the intended distribution of the funds

d)    the creditors agreeing not to pursue a dividend upon acceptance of the Proposal

The monies paid to the creditors under the Proposal are usually sourced through the bankrupt’s friends, family, or associates. To that end, the Bankruptcy Trustee cannot access these funds to form part of the current bankrupt estate.

PROPOSAL

Lodgement

To initiate the Proposal, the bankrupt must lodge the Proposal with their Trustee establishing the terms of the Proposal. Two days after the receipt of the Proposal, the Trustee must then provide a copy to the Official Trustee. The bankrupt may also have the option of proposing an alternative Trustee at this juncture.

Meeting of Creditors

Following the receipt of the Proposal, the Trustee will typically instigate a meeting of the creditors under the Insolvency Practice Rules (Bankruptcy) 2016 (Cth). The Trustee will also prepare a supplementary report providing their advice to creditors concerning the Proposal.

This report will consider several factors, including but not limited to the following:

a)    the origin of the procured funds to make the Proposal to the creditors

b)    a comprehensive analysis of the benefits to creditors should they maintain the bankruptcy in comparison to their entitlements under the Proposal

c)    the bankrupt’s activities pre and post-bankruptcy

Five days before the meeting, the Trustee will provide copies of the Proposal, the report on the Proposal, and other relevant documentation as necessary to the creditors. It should be noted that the meeting may only occur if the Proposal sufficiently covers outstanding remuneration owed to the Trustee. As such, the relevant inquiries should be made before lodging the Proposal.

Creditors Considerations

Creditors may consider several factors when making their decision. However, the main object is the commerciality of the Proposal and the creditor’s associated entitlements.  In most cases, the Proposal may be the more favourable option, given that the creditors are likely to receive a greater return than what they would otherwise be entitled to receive should the bankruptcy continue. It should be noted that in many cases, creditors do not receive any returns from bankrupt estates.

It is also essential to consider whether any security or third-party guarantee has been included within the Proposal. Proposals inclusive of such terms are more likely to be accepted, given that they increase the creditor’s confidence that the Proposal will ultimately be fulfilled.

Creditors may also evaluate the decision from an emotional perspective with regard to the historical conduct of the bankrupt. In some cases, the bankrupt may have engaged in intentionally dishonest or uncooperative behaviours throughout the bankruptcy process, which may ultimately affect the creditor’s voting inclinations. As such, this is an important consideration in the formation of the Proposal.

Acceptance

The Proposal can only be accepted by way of a special resolution. In that regard, the Proposal must be approved by the majority of creditors in attendance. Additionally, more than 75% of the value of the creditors must vote in the meeting. It should be noted that both conditions must be satisfied to pass the special resolution.

Pursuant to section 74 of the Act, passing a special resolution will result in the bankruptcy being immediately annulled. The Trustee will then administer the scheme pursuant to the Proposal by distributing the funds in accordance with the provisions of the Act.

Once all the funds have been disbursed in accordance with the Proposal, the Trustee will finalise the administration of the arrangement under the Proposal and notify the Australian Financial Security Authority accordingly.

RAMSDEN LAWYERS – HOW WE CAN HELP

If you have been declared bankrupt and are considering your options to annul your bankruptcy, a Section 73 Proposal may be a viable solution. If you intend to put forward a Proposal to your creditors, we encourage you to act sooner rather than later. To that end, it is vital that you seek legal advice at the earliest available opportunity.

If you are seeking legal advice, Ramsden Lawyers can assist you. We are happy to arrange an obligation-free initial consultation to assist you in navigating the procedures set out under the relevant legislation for your circumstances. Our Litigation and Dispute Resolution Division specialises in bankruptcy solutions, such as a Section 73 proposal.

Please contact us, and our experienced litigation team will assist you.

The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice.  You should seek specific advice regarding your circumstances.