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| Changes to the Bankruptcy Act: Debt Agreements for bankrupts |
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Contact: Frances Hannah
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Part IX
The 1996 amendments introduced an entirely new form of insolvency administration for a debtor called debt agreements. These were designed to accommodate debtors who had certain levels of debt, assets and income, thus avoiding bankruptcy altogether. The current applicable maximum level of debt and assets is $62, 353.20(1), and the current applicable maximum level of income is $ 31,176.60 (after tax)(2). A debtor must fall within this range of debt, asset and income levels in order to make use of the Part IX process(3).
For the purposes of Part IX, a debtor is a person who is insolvent(4) or would become insolvent if he or she had not been released from debts under s185J: s 185(1). The procedure for debt agreements begins with the giving of a written debt agreement proposal to the Official Trustee (ITSA): s 185C(1). The proposal must conform to the requirements of s 185C(2), and be accompanied by a statement of the debtor’s affairs: s 185D.
A debt agreement proposal may not be given by a debtor if any of s 185C(4) apply. These are:- where at any time in the previous ten years immediately before the proposal time the debtor was a bankrupt, a party to a debt agreement, or had given authority under s 188 for a Part X arrangement; or
- where the debtor’s unsecured debts total more than the threshold amount(5); or
- where the debtor’s divisible property totals more than the threshold amount(6),or
- the debtor’s after-tax income in the current year is likely to exceed half the threshold amount(8).
After the debtor’s proposal for a debt agreement has been accepted by the Official Trustee, the Official Trustee must either call a meeting of the affected creditors, or write to each of the affected creditors: s 185A(1). If a meeting of the affected creditors is held, the proposalmay be accepted by special resolution: s185B(1)(9)If the affected creditors are contacted in writing, the proposal is accepted by a majority in number, and at least three-quarters in value, of the creditors who reply to the Official Trustee’s letter before the relevant deadline: s 185B(3)(10)
The procedure for accepting debt agreement proposal for processing is contained in s 185E. In particular, the Official Trustee must give the debtor certain prescribed information before accepting the debt agreement proposal for processing: s 185E(1), and reg 4.11(1)(11). A statement of affairs(12) must be given to the Official Trustee with the debt agreement proposal: s 185D. The Official Trustee then decides if the debt agreement proposal will be in the creditors’ interest: s 185E(3). The creditors’ meeting to consider a debt agreement proposal, if any, is called by the Official Trustee, and acceptance of the debt agreement proposal is by special resolution: ss 185A(1), 185B(1),(2)(13). A debt agreement is made when the debt agreement proposal is accepted: s 185H. The parties are the debtor and the creditors involved: s 185I. The effect of the debt agreement is to release the debtor from his or her debts: s 185J(1). This effect dates from the entry of the details of the debt agreement on the NPII.
As to the conduct of meetings connected with a debt agreement, the 1996 amendments attempted a codification of meeting procedures in the Act. Division 5 of Part IV of the Act applies to all types of meetings: s 185A(2). However, the Regulations provide for modifications to Division 5 of Part IV for the purposes of certain types of meetings. In particular, reg 9.01 and reg schedule 5 provide for modifications to the standard meeting procedure for the purposes of meetings to consider proposals for debt agreements
A debt agreement may be varied in accordance with s 185M. The debtor is required to give to the Official Trustee a written proposal to vary the agreement: s 185M(1). The Official Trustee must then process the proposal in accordance with s 185A: s 185M(2). This means that the proposal to vary the agreement must be put to the creditors in the same way as the original proposal, and be accepted by creditors in accordance with s 185B: s 185M(3). Acceptance by the creditors means that the agreement is varied accordingly.
Debt agreements end when the obligations under them are discharged: s 185N(1). The debtor is then given a certificate to that effect by the Official Trustee: s 185N(3). However, a debt agreement may be terminated in other ways. These are:- the debtor may give to the Official Trustee a written proposal to terminate the agreement: s 185P(1);
- the debt agreement may be terminated by order of the Court: s 185Q;
- the debt agreement may be terminated by the bankruptcy of the debtor: s 185R
Footnotes
[1]This is the threshold amount as at 20 September 2001. This amount is reviewed six-monthly, and will be adjusted for the relevant CPI increase on 20 March 2002 – see http://law.gov.au/aghome/commaff/itsa/frame_curr.html.
[2]This is half the threshold amount as at 20 September 2001. This amount is reviewed six-monthly, and will be adjusted for the relevant CPI increase on 20 March 2002 – see http://law.gov.au/aghome/commaff/frame_curr.html.
[3]It has been argued that these criteria make the use of the Part IX agreement difficult for debtors. There were 801 Part IX agreements concluded in 2000-2001, which was a 52.68% increase on the previous year. However, consider that in the same period there were 23, 907 bankruptcies.
[4]The definition of insolvency is the same as that in the Corporations Act 2001 (Cth) viz. a person is solvent if the person can pay all the person’s debts as they fall due and payable: s 5(2). A person is ‘insolvent’ if the person is not solvent: s 5(3)
[5]Currently $62,353.20. This is in fact defined in s 185C(5) as being seven times the amount that, at the time, in specified in column 3, item 2, Table B, point 1064-B1, Pension Rate Calculator A, in the Social Security Act 1991 (Cth). It is certainly easier to consult http://law.gov.au/aghome/commaff/itsa/frame_curr.html for the necessary information!
[6]Currently $62,353.20
[7]Currently $31,176.60. The ‘after-tax income’ is calculated in the usual manner as taxable income, less income tax, less Medicare levy, but the ‘year’ in question is measured from the proposal time: s 185C(4)(d).
[8]Defined s 185(1).
[9]See below, n 44.
[10]‘Deadline’ is defined in s 185(2) as the end of the 25th working day after the Official Trustee accepted the debtor’s proposal for processing. ‘Working day” is defined as a day that is not a Saturday, Sunday or a public holiday: s 185(3
[11]This information is also now required to be given to a debtor who is presenting a debtor’s petition: s 55(3A). The object is to make the debtor better informed about his or her options.
[12]Section 6A(2) requires that the statement of affairs be in the Form 3 format.
[13]‘Special resolution’ is defined in s 5(1) as a majority in number and three-quarters in value of the creditors present (either personally, by attorney, or by proxy) and voting on a particular issue.
This is the seventh article in a series from Frances Hannah, Senior Lecturer, QUT Law School.
Other Articles in this series:
1. Major Changes to the Bankruptcy Act: An Introduction
2. Changes to the Bankruptcy Act: Exclusive Federal Jurisdiction and Streamlining of Procedures
3. Changes to the Bankruptcy Act: Duties of a trustee in bankruptcy
4. Changes to the Bankruptcy Act: Forms; Regulations and NPII
5. Changes to the Bankruptcy Act: Antecedent transactions in the Bankruptcy Act
6. Changes to the Bankruptcy Act: Contributions by a bankrupt
7. Changes to the Bankruptcy Act: Debt agreements for bankrupts
8. Changes to the Bankruptcy Act: Insolvency administration outside bankruptcy
9. Changes to the Bankruptcy Act: The 2001 Proposals
April, 2002
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