Section 73 Administration

Click here for a brief summary of Section 73 Administration.

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WHAT IS A SECTION 73 PROPOSAL?

Section 73 of the Bankruptcy Act ("the Act") allows a bankrupt to put forward a proposal (‘s73 proposal') to his or her creditors as a form of compromise. It is a formal agreement between a bankrupt, creditors and a person that administers and monitors the arrangement (a registered Trustee), as a means of resolving debt problems of a bankrupt. If creditors accept a s73 proposal, the bankruptcy is annulled (that is, the bankruptcy is said to have never occurred).

A s73 proposal is similar to a Part X Agreement. A s73 proposal occurs after bankruptcy whereas a Part X agreement occurs instead of bankruptcy.

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OBJECTIVES OF A S73 PROPOSAL

The main objectives of a s73 proposal are to:

  • provide relief to a bankrupt from debt problems and extinguish existing debts;
  • provide a formal method for a bankrupt to put forward a proposal to their creditors subject to the provisions of the Bankruptcy Act to annul (and be released from) the bankruptcy;
  • protect a bankrupt from the stigma and restrictions of remaining in bankruptcy; and
  • provide a better outcome to all stakeholders (generally a higher dividend to creditors) than would be expected if the bankruptcy were to continue.

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BENEFITS OF A SECTION 73 PROPOSAL

Bankrupts

The benefits of a s73 proposal for a bankrupt include the following:

  • allows the bankrupt to start life afresh;
  • can result in the affairs of the bankrupt being finalised sooner than if the bankruptcy were to continue;
  • provides protection to the bankrupt and an orderly distribution amongst all creditors;
  • avoids the stigma and consequences/restrictions of remaining in bankruptcy;
  • can be structured to allow a great deal of flexibility for all parties concerned;
  • a bankrupt can act as a director or take part in the management of a company after a s73 proposal is approved by creditors; and
  • provides a formal agreement that is binding upon all parties.

Creditors

The benefits for creditors include the following:

  • often provides for a better return/dividend to creditors compared to the returns expected if the bankruptcy continues;
  • can often receive a dividend quicker than if the bankruptcy continues;
  • can result in the affairs of the bankrupt being finalised;
  • provides a formal agreement that is binding upon all parties;
  • generally is cheaper to administer than a bankruptcy; and
  • can be structured to allow a great deal of flexibility to all parties concerned.

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TYPES OF PROPOSALS

There are 2 types of s73 proposals.

  1. Composition
  2. Scheme of Arrangement

Both proposals, if accepted by creditors, result in the bankruptcy being annulled.

1. Composition

A Composition is an arrangement of the affairs of a bankrupt with a view to the payment in whole or in part, of his or her debts.

A s73 Composition is not defined in the Act. Compositions typically involve a lump sum payment of money and/or property assigned or transferred to the Trustee upon the acceptance of the s73 proposal. The payments or property can be from the bankrupt (for example from his or her income) or a third party.

2. Scheme of Arrangement

A Scheme of Arrangement is also not defined by the Act. It is also a form of arrangement of the affairs of a bankrupt with a view to the payment in whole or in part, of his or her debts.

A Scheme of Arrangement can include the payment of funds or property being transferred to a Trustee to realise for creditors. Such arrangements generally involve money paid by instalments over a period of time to the Trustee to distribute to creditors. The payments may be made by a bankrupt or by a third party.

The main difference between a Composition and a Scheme of Arrangement is that a Scheme of Arrangement is often resolved over a period of time. A Composition often involves a lump sum payment and is finalised more promptly.

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SECTION 73 PROCESS

The process begins when a bankrupt provides the Trustee with a written proposal signed by him or her setting out the terms of the proposed Composition or Scheme of Arrangement and particulars of any sureties or securities forming part of the proposal. The Trustee will generally assist the bankrupt with the format of the proposal to ensure that the proposal is appropriately drafted.

The Trustee will provide a copy of the proposal to the Official Receiver (Insolvency & Trustee Service Australia "ITSA") and creditors along with the Trustee's report on the proposal. The report must also indicate whether the Trustee believes that the proposal would benefit the bankrupt's creditors generally. To enable the Trustee to report to creditors, the bankrupt must provide full details of his or her affairs as required by the Trustee.

The Trustee will then either:

  1. Call a meeting to consider the proposal; or
  2. Write to each creditor asking whether the proposal should be accepted or rejected and request that they respond in writing (usually by completing a voting form, which is similar to a proxy form) by a deadline date. Creditors can object to this process, in which case a meeting must be held.

The proposal is accepted if a special resolution is passed, that is, the majority in number and at least seventy-five per cent (75%) in value of the creditors who reply/vote before the deadline accept the proposal.

The Trustee may refuse to call the meeting if the proposal does not make adequate provision for payment to the Trustee in relation to his or her remuneration, provide adequate surety for costs of calling a meeting or if the Trustee is not able to determine whether the s73 proposal would benefit creditors. This may occur if the Trustee has not finalised investigations into the bankrupt's affairs and hence cannot form an opinion as to whether the proposal is in the creditors' best interests.

If the proposal is accepted, a registered Trustee or the Official Trustee (ITSA) must be appointed to administer and monitor the arrangement. The bankruptcy is annulled on the date upon which creditors accept the proposal. The parties to the s73 proposal are then bound by its terms and the debtor and Trustee will fulfil their respective responsibilities under the arrangement.

A bankrupt is often referred to as a debtor upon the acceptance of the s73 proposal.

If the s73 proposal is not accepted at the meeting of creditors, the Trustee will continue to administer the bankruptcy. A bankrupt can put forward another s73 proposal at any time in the future but prior to the date of discharge from bankruptcy.

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ELIGIBILITY

Any person (individual) who is a bankrupt may put forward a s73 proposal. A s73 proposal cannot be submitted jointly by 2 or more bankrupts. Each bankrupt must submit a separate proposal.

A Trustee may however insist that a bankrupt provide the following prior to proceeding to convene a meeting to consider the bankrupt's s73 proposal:

  • all information and records necessary for the Trustee to form an opinion as to whether the s73 proposal would benefit creditors; and
  • sufficient funds to cover the costs of the meeting.

The Trustee may also refuse to put forward the bankrupt's s73 proposal to creditors if the proposal does not adequately provide for the Trustee's accrued and approved remuneration.

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WHO CAN ACT AS TRUSTEE?

  1. A Registered Trustee; or
  2. The Official Trustee (ITSA).

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DUTIES & POWERS OF THE TRUSTEE

The duties and powers of a Trustee should be detailed in the s73 proposal. The Act provides little specific guidance on the provisions that are included in a s73 proposal. Section 73 proposals are generally drafted to incorporate specific provisions of the Act to clarify the Trustee's duties and powers.

The Trustee's duties and powers essentially include to:

  • perform any functions bestowed upon the Trustee under the s73 proposal, such as realising property, collecting money and paying a dividend to creditors;
  • keep creditors updated on the progress of the s73 proposal; and
  • monitor the terms of the s73 proposal and take appropriate steps if the s73 proposal is not complied with (such as recover property, terminate the proposal or apply to re-bankrupt the debtor).

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EFFECT OF A SECTION 73 PROPOSAL ON A DEBTOR

The debtor is required to comply with the terms of the s73 proposal. Failure to comply with the terms of the proposal will generally result in the debtor being made bankrupt again. Other effects on the debtor include:

  • the bankruptcy is annulled, effectively meaning that the bankruptcy did not occur;
  • the debtor is released from his/her debts;
  • property that is not specified or dealt with in the s73 proposal is not available to creditors and reverts to the debtor (unless the Court orders otherwise);
  • the debtor is bound by all of the sales and dispositions of property and payments duly made, and all acts done, by the Trustee or any person acting under the authority of the Trustee or the Court before the annulment.

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EFFECT OF A SECTION 73 PROPOSAL ON CREDITORS

Unsecured Creditors

The major effects that a s73 proposal has on unsecured creditors are:

  • they are bound by the terms of the s73 proposal and their rights against the debtor lie in their ability to claim in the estate and participate in any dividend that may be paid from funds recovered by the Trustee;
  • the debtor is released from his or her provable debts;
  • similar to bankruptcy, the debtor does not obtain a release from certain debts , such as debts incurred by means of fraud, penalties or fines imposed by a Court, sums payable under a maintenance agreement or order and HECS debts.

Secured Creditors

  • Secured creditors with valid security are able to enforce their rights pursuant to charges or securities that they hold over assets of the debtor.
  • Secured creditors are entitled to claim as an unsecured creditor for the amount by which their debt exceeds the value of the property over which they hold security.
  • A secured creditor may however forfeit its security and claim for the full amount of its debt.
  • A secured creditor may lodge a claim in the administration for any resultant deficiency after the security has been realised.

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DISTRIBUTIONS / DIVIDENDS TO CREDITORS

The proposed distributions/dividends to creditors will be set out in the s73 proposal. Generally, the Trustee will collect the funds and/or realise property subject to the s73 proposal and pay a dividend to creditors when there are sufficient funds available.

The Act does not have any specific provisions for the manner of paying dividends for a s73 proposal. However, the provisions of the Act that applies for bankruptcies are generally incorporated into the s73 proposal.

In these circumstances, the Trustee must prior to paying a dividend, issue a Notice to those creditors who have not lodged a formal claim (known as a Proof of Debt form), requiring them to lodge a claim by a certain date. If creditors do not lodge a formal claim by the required date, they may be excluded from receiving a dividend. The Trustee then must wait a further 21 days (after the date by which claims must be lodged) before the dividend is paid.

A s73 proposal does not require dividends to be paid in any specific order, nor does it afford different classes of creditors any priority over other classes of creditors. All creditors will be afforded the same priority under the proposal unless it specifically provides that certain creditors are to receive a priority above other classes of creditors.

Some s73 proposals incorporate the priorities applicable under the Act for bankruptcies. In such a case, the funds available to pay a dividend are to be distributed in the following order:

  1. Wages, salary, superannuation or commission due to employees, including allowances or reimbursements (presently limited to $3,500), but excluding long service leave, extended leave, annual leave, recreation leave and sick leave;
  2. Compensation payable relating to workers' compensation;
  3. Amounts payable in relation to workers' leave entitlements;
  4. As the Trustee deems fit, refunds of any apprenticeships / indenture fees paid;
  5. Such preferences, priorities or advantages as creditors approve by special resolution;
  6. Such costs, charges and expenses incurred in the interests of creditors before the date of bankruptcy as creditors approve by special resolution;
  7. Unsecured creditors proven debts;
  8. Any deferred entitlement to interest; with
  9. Any surplus refunded to the debtor.

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REMUNERATION & COSTS OF THE TRUSTEE

The remuneration and the costs of the Trustee in bankruptcy and the Trustee of the s73 proposal may be paid by the debtor, a third party or from the funds/property available under the proposal. Generally, the remuneration and costs are paid from the assets/funds recovered under the s73 proposal (or the earlier bankruptcy for the remuneration of the Trustee in bankruptcy).

If the Trustee is to receive a priority for remuneration under the proposal, the Trustee must obtain the approval of creditors. Generally, the Trustee's remuneration/expenses/outlays will be paid in priority to the claims of unsecured creditors (government charges are paid in priority to both).

The alternative methods available to approve the remuneration of a Trustee are as follows:

  1. a resolution passed by creditors at a meeting of creditors;
  2. a resolution passed by creditors via a single resolution postal process;
  3. a resolution passed by a committee of inspection (if appointed); or
  4. the Bankruptcy Regulations.

Where either the debtor or a creditor are dissatisfied with the amount of remuneration taken by a Trustee, that party may, by notice in writing lodged within 28 days of being notified in writing or becoming aware of the amount of the claim for remuneration, request a taxing officer to tax the remuneration.

If taxation results in a reduction of at least 15% in the amount of a claim for remuneration, the Trustee must meet the costs of the taxation. Otherwise, the person who asks for the taxation must meet the costs. If any creditor wishes to have remuneration reviewed, you should contact the Insolvency and Trustee Service Australia, Level 13, 340 Adelaide Street, Brisbane, telephone (07) 3360 5444.

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PUBLIC RECORD

Section 73 details are available to the public via a Government database known as the National Personal Insolvency Index ("NPII") and usually on databases of credit reference agencies. Access to the Government database can be obtained by contacting information brokers such as Australian Business Research ("ABR"). Searches can be conducted by accessing our website at www.svpartners.com.au.

Details of the debtor's name, address, date of birth, occupation and the number of the administration will remain on the NPII forever.

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VARYING A SECTION 73 PROPOSAL

The Trustee or creditors may vary a s73 proposal, provided that the debtor gives his or her written consent. The s73 proposal may be varied in one of the following ways:

  • A meeting of creditors may be convened to consider the proposed variation to the s73 proposal. The Trustee will issue a notice to creditors detailing the proposed variation(s) and the time, date and place of the meeting. At the meeting, creditors will resolve by a vote whether the variations to the s73 proposal are approved. The resolution is to be decided in accordance with majorities required for a special resolution (majority in number and 75% in value of those who vote at the meeting).
  • The Trustee may issue a Notice to all known creditors providing details of the proposed variation and its likely impact. If no creditor objects to the proposed variation by a specified date (deadline), the variation takes effect on the specified date. If a creditor objects to the proposed variation in writing by the specified date, a formal meeting of creditors must be convened to consider the proposed variation to the s73 proposal.

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ENDING A SECTION 73 PROPOSAL

A s73 proposal can be ended in the following ways:

  • When all of the terms of the agreement have been fulfilled, that is, all parties have completed their obligations and responsibilities under s73 proposal.
  • If the terms of the s73 proposal are not complied with, the Trustee and/or creditors terminate the agreement.
  • By an order of the Court. This involves the Trustee or a creditor making an application to the Court. The reasons why the Court may make an order to terminate (annul) the s73 proposal include:
    1. the Composition or Scheme of Arrangement cannot be proceeded with without injustice or undue delay to the creditors or to the bankrupt; or
    2. the approval of the creditors was obtained by a misrepresentation by the former bankrupt; or
    3. it is desirable that the affairs of the former bankrupt be investigated and administered under the provisions of the Act relating to bankruptcy; or
    4. it is likely that the creditors will receive a greater dividend if the former bankrupt is again made a bankrupt.

Generally, the Court will take into consideration whether terminating the s73 proposal is in the best interests of creditors.

The Court may also make an order declaring the debtor bankrupt again.

Contact us to discuss the specific details of your individual situation.

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