Written by Hiteshi Dekhtawala in April, 2010

The purpose of this article is to discuss a number of options under the Bankruptcy Act which may be available to a person who has an insolvency problem.  For the purposes of this article, this person will be referred to as a Debtor.

For those that may not be aware, a Debtor will have the following options available to them under the Bankruptcy Act:-

• Voluntarily declare themselves Bankrupt i.e.  a Debtor’s Petition;

• A Creditor may apply to Court for an order for the Debtors Bankruptcy i.e. a Creditor’s Petition;

• After entering into Bankruptcy by either a Debtors or Creditors Petition, the Debtor may propose to Creditors an arrangement to settle the debts in the Bankrupt Estate under Section 73 of the Bankruptcy Act.  If Creditors resolve to accept the proposal, the Bankruptcy will be annulled.

• In continuing with the above example, should the Estate receive sufficient funds to pay out the claims of all Creditors, and the costs of the Trustee and any statutory charges, the Bankruptcy will be annulled;

• Prior to availing the option of entering into Bankruptcy, the Debtor could approach his/her Creditors to enter into an arrangement with his or her Creditors in accordance with Part X of the Bankruptcy Act, which is referred to as a Personal Insolvency Agreement (“PIA”); and

• The Debtor could also consider utilising an agreement pursuant to Part IX of the act which is called a Debtors Agreement.  It is similar in its effect as a PIA, but its intended use is for smaller estates with lesser assets and lesser creditors.

People some times confuse a Section 73 proposal and an Annulment with a Part X Agreement. Here is a bird’s eye view of the distinction between these matters:-

Section 73 Proposal
Annulment
Part X Arrangement i.e. Personal Insolvency Agreement
Point of Occurrence
The Debtor proposes to the Creditors after entering into Bankruptcy.
The Debtor pays out all of his or her debs after entering into Bankruptcy.
The Debtor puts forward a proposal to Creditors instead of entering into Bankruptcy.
Status of the Debtor/Estate
Is a Bankrupt/Bankrupt Estate
Is a Bankrupt/Bankrupt Estate
Is not a Bankrupt, is only an Insolvent person. i.e. a person with financial difficulty.
Appointee
Is referred to as the Trustee of the Estate.
Is referred to as the Trustee of the Estate.
Is referred to as the Controlling Trustee during the course of the Controlling Trusteeship, and is subsequently referred to as the Trustee of the PIA once the PIA comes into effect.
Satisfaction of Debts
The Debtor submits a proposal to his/her Creditors for settling the debt, and a dividend to Creditors is declared at a rate of XX cents in a dollar, depending on the funds available in the Estate.
Sufficient funds are received into the Estate to enable a return to creditors of 100 cents in a the dollar.
The Debtor submits a proposal to his/her Creditors for settling the debt, and a dividend to Creditors is declared at a rate of XX cents in a dollar, depending on the funds available in the Estate.
Interest on Debts
Creditors are not entitled to seek to claim for interest after the date of Bankruptcy.
Debts are paid in full and the Creditors whose claims are entitled to bear interest are entitled to be paid any interest which has accrued upto the date on which the dividend is declared.
Creditors are not entitled to seek to claim for interest after the date of Bankruptcy.

Please note for the comparison above, a Debt Agreement is similar in its operation to a PIA, except for the scale of the assets and debts involved.  For this reason, Debt Agreements have not been provided with their own column.

The most interesting point to note from the above is that a Section 73 Proposal is similar in its outcome as a PIA.  That is, a proposal is put forth to creditors, and should they resolve to accept the proposal, the Bankrupt will be released from the Bankruptcy and the terms of the Section 73 Proposal will provide the outline for the future conduct of the Estate.

The main benefit of a Section 73 proposal over a PIA is such that should creditors resolve to accept the Section 73 proposal, the Bankruptcy is “void abonitio”.  The effect of this is that it means it never happened.

Therefore, for those people who are in careers, or wish to enter into careers in the future whereby you would not be eligible to pursue the career if you were previously Bankrupt an insolvent having been party to a PIA, the Section 73 Proposal may provide a better outcome than a PIA as in theory, the Bankruptcy did not happen, and therefore, the Debtor would still be eligible for that career path in the future.