Introduction
Amendments to the Bankruptcy Bill provided an opportunity to the debtors in settling their debts because it reinforced the existing opportunity for the debtor to enter into an agreement with the creditor without necessarily disrupting the business operations. The Bankruptcy Act of 1966 provided that a creditor could enter into an agreement with their debtor through the “deed of assignment”, “deed of agreement” and a “composition”. However, the amendments of 2004 introduced “personal insolvency agreement” in place of the three types of agreements. The changes brought a number of advantages as well as disadvantages as will be seen in this paper. A proposal for further amendments to the bill was brought forward in 2008 to harmonize state legislation relating to the act, with the Commonwealth Bankruptcy Act.
Both the Part X provisions of the Bankruptcy Act 1966 and the Personal Insolvency Agreements introduced in 2004 provided an opportunity for the debtor to settle the debt without the debtor having to enter into Bankruptcy. However, the two differed in that Part X provisions provided three options under which the debtor’s intentions (proposals) to pay the debts would be expressed, while the three options were not available under the Personal Insolvency Agreements. The option provided by the Part X agreements moistly favored high-income earners.
Advantages and Disadvantages arising from the Bankruptcy Provisions
The provisions of the Bankruptcy Act provided advantages in view of the challenges of becoming bankrupt. The person who would turn to be bankrupt would be subjected to several things including a thorough investigation of his or her financial affairs and dealings. Thus, in order to evade this, people would prefer the option of bankruptcy. By avoiding bankruptcy, the debtors will be able to avoid the set rate which they are required to pay towards the debts if they are entitled to an income. Entering would also not be preferable if the debtors did not want to lose valuable property, which is a likelihood for those entering bankruptcy. Heavy burdens for monthly payments to the debts would also render the person insecure about losing the property if it becomes difficult for him to pay them. Entering Bankruptcy also meant that the persons would not obtain credit to some extent, and usage of such facilities as a cheque, without declaring that they are bankrupt. In addition, being bankrupt puts the debtor at a disadvantage if he would want to obtain credit in the future (Legal Aid Commission, 2009). The regulation also bars some individuals from entering into debt agreements provided in the bankruptcy regulation. A person who had become bankrupt previously cannot be available for this option again, which means that he may opt for the option to make an agreement to pay the debt. There is a financial obligation requirement to enter a debt agreement, that the after-tax income must be less than the current amount. The persons entering into debt agreements are barred from paying the debts as and when they become due, and that they must be in possession of divisible property worthless the current amount. A personal insolvency agreement may be more appropriate if the debt agreement is not honored. Alternatively, the person may be forced to enter bankruptcy under these circumstances.
However, there were advantages that accrued to the individuals becoming bankrupt. These included an opportunity for them to start afresh and protection of all social security pensions and benefits. The debtors are relieved of the strenuous and stressful demands from the creditors who want their money repaid. The debtor also will be subjected to retaining some property under the appropriate act, if he becomes bankrupt. This property cannot be used to repay the debt (Legal Aid Commission, 2009).
Personal Insolvency Agreements
Through the introduction of the Personal Insolvency Agreements, debtors are able to make arrangements with their creditors outside bankruptcy on how to repay the debts. This could either be through sale or surrender of part or all of their personal assets and income, or from other sources. Before the PIA takes effect, the individual property is under control of a Controlling Trustee and the creditor has an opportunity to determine whether the PIA offer is in their best interest. A trustee will oversee the carrying out of the terms of the PIA agreement once they are accepted by the creditor.
In cases where an individual has several creditors, they will hold a meeting over acceptance of the PIA terms. It is understood from a business perspective that some creditors will be secured while others would not. The acceptance binds the unsecured creditors in that they cannot take further legal action, while the individual is released from debts to an extent specified in the PIA terms.
PIA provisions provided an opportunity for a business to continue operating while free from creditors’ pressure and burden from credit liabilities (Divitkos, 2007).
There are challenges and problems that have been reported with the operation of Part X of the Bankruptcy Act, some of which have necessitated carrying out of amendments. The opportunity provided by the regulation to have the debtor opt for bankruptcy, has in a way, been dogged with irregularities. An example is relating to impartiality of the person chairing the creditors’ meeting convened through the Controlling Trustee. This may influence the outcome in favor of the debtor. In addition, the adequacy of the information supposed to be prepared by the Controlling Trustee relating to the financial position of the debtor, is of importance. The information may influence the acceptance of the agreements by the creditors. The abuse of and retort to the provisions of Part X and the fact that they favored the rich, sparked the debate for need of amendments to the act in 2002. An example is the uproar to that extent, posited by Robert McCLelland, the then Shadow Attorney-General in Australia (Dudley, 2004). Such problems may be dealt with by the current provisions of the Bankruptcy Act which provides the personal insolvency agreement terms. The personal insolvency agreement may be put aside by the court, for example, if the steps leading to its establishment are flawed. Creditors are further shielded through the provisions of the personal insolvency agreement in that it may put the agreement aside if the terms are not beneficial to the creditor. Such may be the case where the Trustees may be acting in favor of the debtor, or against the creditors’ wishes. Further, the legality of the process of establishment of the agreement is observed under the provisions in the 2004 amendments, which avails that the agreement may be set aside if it not entered in conformation to the requirements of Part X. The loopholes which existed before, where the debtors could use false financial and other information in his favor, have been sealed in the fact that a court may set aside the agreement in such a case. In addition, because the Controlling Trustee could provide false advice relating to the viability of the agreement to serve the creditors’ interests, there was a loophole in the former provisions (Dudley, 2004). Amendments provided an option for setting aside of the personal insolvency agreement under such conditions, so as to shield the creditors from exploitation.
The amendment also provided the chance for any of the parties (debtor or creditor) to apply for the termination of the agreements, although such an act would automatically lead to having the debtor put into bankruptcy (Dudley, 2004). The latter may have its implications for the two parties.
Part X provisions in the 1966 Act provided flexibility through the possibility for implementation of the three types of arrangements, namely deed of arrangement, deed of assignment and composition. However, the process of such arrangement was complex under these provisions. While the flexibility provided in the former regulations was retained in the amendments that introduced the personal insolvency agreement, the latter simplified the process for these agreements.
Many obstacles may arise in relating to the establishment and implementation of the PIA terms once it has been proposed. A debtor’s proposal for personal insolvency may be rejected through a vote by the creditors’ in the meeting held in the presence of the debtor. Under such circumstances of the rejection of the proposal, the creditors may leave the debtor to decide what other means he should settle the debts, or may vote in favor of the debtor becoming bankrupt. A proxy or an attorney may represent the creditor in the meeting which is held 25 days after the appointment of the controlling trustee. Alternatively, the law allows the creditor to participate in the meeting through telephone.
The regulation is supportive of the creditors in trying to eliminate any bias relating to debtor’s credibility as posited in the PIA request, since it allows them to question the debtor before voting, and share any information about him with the controlling trustees. Therefore, in part, the failure of the agreement during the implementation could arise if the creditors fail to play their vital role in establishing the credibility of the information presented to them by both the controlling trustee and the debtor. No matter how much the Bankruptcy Act may try to eliminate the loopholes, the parties must play a vital role in ensuring that the agreement works well and the process is not flawed. For example, it is the duty of the parties to ensure that some of the issues relating to the success of the process, such as the credibility of the trustee appointed, are dealt with satisfactorily. The regulation provides that the controlling trustee position should be held a qualified solicitor or a registered trustee.
Although the personal insolvency regulation provides a lot of flexibility in the settling of the debts, it may be considered in that perspective, to introduce a lot of bureaucracy. For example, where the debtor proposes variations of the agreement and hence writes to the trustee to this effect, the creditors will have to be summoned for a meeting to discuss the proposed variation if a certain creditor has written in objection of the variation proposals. In addition, the process may take longer than would be anticipated because of the doorways to propose variations. The terms of agreements may also be varied by creditors through the passage of a special resolution, but the debtor must be informed.
Although PIA may be regarded as better options to bankruptcy, the debtor may be forced to enter into bankruptcy once the establishment of PIA fails. This is because the election of a controlling trustee by him (the debtor), is commission of an ‘act of bankruptcy’ which creditors can use to apply to the court to have the debtor be forced to enter bankruptcy. Another limitation of entering into personal insolvency under Part X as compared to entry into “Deed of Assignment” is that the law bars the debtors from managing a corporation if the terms have not been fully complied with (Setter Shepard, n.d.).
Debt agreements are also preferable to entering bankruptcy because the individuals will be liable to holding certain licenses; avoid some employment restrictions, and restrictions such as those related to traveling overseas. Although debt agreements may be regarded as better than bankruptcy, there are disadvantages that accrue to them as well. The individuals may not access credit facilities during the term in which they are into these agreements. In addition, their names are entered, and remain in the databases of credit reference agencies and the Commonwealth Government database.
Conclusion
In conclusion, the amendment to the Bankruptcy Act retained the flexibility that was available in the previous Part X of this regulation. The Bankruptcy Act provides that the debtor can settle debts without entering bankruptcy, through an arrangement open to the creditors. This arrangement may provide that the debtor pay the debts from part of his property, by funds from a third party or other means. The opportunity to make such an arrangement provides the debtor with a chance to continue having his/her business run without the debt burden or other interruptions. The debtor renders his or her property to be under the control of the controlling trustee. The controlling trustee furnishes information regarding the debtor, and an advice on whether the plan would serve the creditors’ interests so that they can accept it. The creditors will have to be convinced in order to accept and hence vote the repayment plan proposed by the debtor. Once the proposal has been passed by a vote the debtor will be freed from the debts. Failure to accept the plan will mean that the debtor may as well enter into bankruptcy as the other option.
There are many huddles regarding the execution of the arrangement to pay the debt, when the debtor does not want to enter bankruptcy. The flaws which may occur during the process of implementation or establishment of the personal insolvency arrangement may however be dealt with by the court, which retains the power to alter the agreement. The parties may make changes to the initial agreement which means it is flexible. It has been discussed here that the creditors may also seek to vary the terms of the agreements but need to notify the debtor. This is also another channel for flexibility. The amendment to the initial provisions ensured that the process to the agreement establishment was simplified. However, the flexibility available in the current provisions such as the requirement that the creditors will have to be called in for a meeting if one creditor writes in objection to the debtor’s requirement for a change, may introduce further delays.
References
Divitkos, G. (2007). Business recovery and insolvency: Regain control of your financial situation. BDO Kendalls. Web.
Dudley, S. Bankruptcy Legislation Amendment Bill 2004: Bankruptcy (Estate Charges) Amendment Bill 2004. Law and Bills Digest Group. Web.
Legal Aid Commission of Tasmania. Bankruptcy-general principles. Legal Aid Commission of Tasmania. Web.
Setter Shepard. (n.d.). Part X agreements. Setter Shepard. Web.