Restructuring, Turnaround and Insolvency Specialists

PART X – Personal Insolvency Arrangements

A Personal Insolvency Agreement (a PIA) must specify the following:

  • The property or income to be dealt with and the method with which it will be dealt.
  • Whether antecedent (clawback) provisions apply.
  • How the monies available under the PIA are to be distributed (it is possible for different amounts to go to different classes of creditors).
  • Whether the PIA seeks to free the debtor from all provable debts.
  • How and when the PIA can be terminated.

Starting a Personal Insolvency Agreement

Once you have considered your options and if you form the view that a PIA is the best alternative for you, your first step is to execute an authority pursuant to Section 188 of the Bankruptcy Act. After a trustee consents to control the estate, a meeting must be held within 25 working days of signing the Section 188 authority (or 30 working days if the authority is signed in December). The signing of the Section 188 authority is an act of bankruptcy.

After the Section 188 is signed documentation is then lodged with the AFSA and you will be issued with a number that is entered on the public records. Potential creditors can search those bankruptcy records.

The controlling trustee will take charge of all your assets for the benefit of the creditor (or creditors). If you are in business, you can continue to trade on a cash basis but are prohibited from paying any old debts between the time you sign the Section 188 authority and the meeting with the creditors.

When executing the Section 188 Authority you, as the debtor, must do the following:

  • Complete a Statement of Affairs by listing all your assets and liabilities, details of previous business and company involvement, and income details.
  • Provide a draft PIA that sets out the term of proposals to the creditors.

As soon as possible after his or her appointment, the controlling trustee will send a notice disclosed on the Statement of Affairs to the creditor (or creditors). A report will be compiled detailing the results of the trustee’s investigation into your affairs. The report will also include a formal notice about the time and place for a meeting of creditors. (This must be forwarded to the creditors no less than ten days prior to the meeting).

The costs of agreements administered by trustees in bankruptcy are normally taken out of payments to the creditors. It is usually an agreed payment determined on a time basis. In the report to the creditors the trustee is required to provide rate details, a brief expected work outline and an estimate of costs.


Following the appointment of the Controlling Trustee, they will prepare a report which must include the following details:

  • Background information and causes of financial difficulty.
  • A summary of the assets and liabilities.
  • Details of insolvency practitioner investigations.
  • Voidable dispositions.
  • Details of the debtor’s income and what would be available to the creditor (or creditors) under the proposal/bankruptcy.
  • Details of the proposal and how it is to be funded.
  • The estimated return to the creditors.
  • The estimated return to creditors if the proposal is accepted.
  • A recommendation as to what is in th best interest of the creditors.

Voting Requirements

The meeting of the debtor’s creditors can proceed only if there is a quorum. This means there must be at least one creditor and the trustee, or their representatives, present. The debtor’s offer must be accepted by special resolution, meaning the majority of those present at the meeting must vote in favour of the offer – personally or by proxy. Those who vote in favour must represent 75 per cent of the money owed to those taking part in the vote.

Creditors may attend the meeting in person or by proxy or by telephone.

If the creditors refuse the debtor’s proposal then the following can occur:

  • The debtor can voluntarily petition for their own bankruptcy, or;
  • The creditor (or creditors) can resolve that the debtor no longer have control of the trustee. (This effectively places the debtor in the position they were in before signing the Section 188 Authority).

Both of these options are subject to the same voting requirements.

If a special resolution is unable to be passed at the meeting, the Section 188 Authority lapses four months after it became effective.

Creditors’ Rights to Vote

Creditors should ensure they have correctly completed the proxy form and supplied evidence of the debt to the controlling trustee. If in any doubt, creditors should contact the controlling trustee’s office.

Common mistakes creditors make when completing the proxy form can include:

  • Failing to sign the form.
  • Failing to appoint a natural person to be the proxy holder.
  • Failing to affix the company seal (if required) or to provide evidence the person completing the form has the legal right to execute such a document on the company’s behalf.
  • Failing to specify how they wish the proxy holder to cast their vote.

Creditors should also ensure they have provided proof of the debt to the controlling trustee. This can be in the form of invoice copies and/or a personal guarantee.

Please note: An incorrect proxy and inadequate supporting documentation can mean the creditor is ineligible to vote.

Secured Creditors

Under the Bankruptcy Act, a secured creditor must value his or her security and only vote for the shortfall. If they fails to do that, or values it at nominal value, they run the risk of losing or surrendering their security. Most secured creditors are well aware of this and will usually either seek to vote only for their shortfall. In some cases they may abstain from voting.

If the creditor holds security in the form of perfected security interest (often registered on the Personal Property Securities register over another person’s property – ie: not the debtor – the creditor may vote for the full amount of debt.

Assigned Debts

Due to amendments to the Bankruptcy Act, creditors whose debt has risen as a result of an assignment of debt are limited to vote for the amount they paid for the debt – instead of its face value. If a creditor, therefore, purchased a $1 million debt for $50,000 they would only be able to vote for $50,000.

Associated Parties

Associated parties are allowed to vote at any meeting of creditors. On the Statement of Affairs, the debtor must disclose all related party creditors. The controlling trustee should ensure there is sufficient evidence to satisfy themselves that the debt is genuine before allowing these creditors to vote.


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