Bankruptcy can be a very concerning and daunting prospect of any business person or entrepreneur, however under the Bankruptcy Act 1996 there are alternative options to avoid such positions.

A personal insolvency agreement (PIA) is a formal agreement between a debtor, who may be in serious financial trouble, and their creditors to satisfy their debts without being made bankrupt.

The benefits of a PIA may include a number of things, including:

  • Avoiding bankruptcy;
  • Release from provable debts owed to creditors;
  • Protect certain assets from being sold, which may otherwise be realised in bankruptcy;
  • No requirement to pay income contributions;
  • No restriction to travel, trading business and incurring debts.

In order to begin the process, the debtor must choose a controlling trustee who will review the debtor’s circumstances. Generally, the trustee will require:

  • Authority granted under section 188 of the Bankruptcy Act giving them control over assets and the impetus to call a meeting of creditor to consider the PIA;
  • A Statement of Affairs that contains details of all assets, liabilities and other relevant personal information;
  • A draft personal insolvency agreement that outlines the terms of the proposal to be made.

The terms of the agreement can comprise of almost any lawful terms and conditions. However, it usually provides a moratorium on creditors claims for payments with arrangements for payment of monies over time which may include the sale of assets.

Once this is provided to the trustee, same will compile a report which will contain a comprehensive summary of the debtor’s financial affairs, assets, creditors, estimated returns should they become bankrupt or an agreement reached and finally a recommendation to creditors on whether to accept the proposed PIA.

In order for the proposal to be accepted, a meeting of creditors must be held by the trustee within 25 business days. In order for the PIA to be accepted, at least 75% of the value of creditors debts present and voting at the meeting must pass the special resolution and the creditor must represent a majority in number voting on the day.

In the process of a PIA, the signing of the section 188 authority counts as an act of bankruptcy which can be used by creditors to apply to the Court to have the debtor made bankrupt if the proposal is not accepted. Similarly, credit agencies will record that the debtor has signed the authority, however this is still often more favourable than bankruptcy.

Throughout the process of a PIA, the debtor cannot act as director of a company while subject to the terms of the agreement, yet once the debtor satisfies the agreement requirements then the PIA is considered over and all restrictions lifted. Furthermore, this administration attracts a government charge known as a ‘Realisation Charge’, which is payable at the rate of 7% currently of the gross monies received into the estate, less payments to secured creditors and various trade on costs.

With a team of experts at the ready, led by Bill Karageozis as registered trustee, we at McLeod and Partners are able to provide you any help and advice you may need. For more information, please contact us today.