As insolvency practitioners we are use to forming, documenting and processing very formal arrangements created under the provisions of the Bankruptcy Act and used by debtors wishing to satisfy their debts without becoming bankrupt.
The benefits of entering into formal arrangements include:
- When accepted by the required majority, the agreement will bind all creditors and will remain in force while the terms of the agreement are being fulfilled. Because decisions are made by a majority of creditors the attitude of one or more unreasonable creditors can be nullified.
- Any breach of the agreement by the debtor will be an Act of Bankruptcy and can be used to bankrupt the debtor.
- Everyone knows what is expected of everyone else and when it is expected and the terms can be enforced.
- There is an independent person (the trustee) looking after the interests of the creditors, as well as the interests of the debtors themselves.
- At the end of the term of the agreement and the fulfillment of its terms, the unpaid portion of the debts is released.
But there are times when a less formal approach may be required to make any agreement practical. There are times when a bankruptcy or the signing of a Part X authority will cause problems with the debtor’s ability to earn the income – or continue with their current income – when that income is to be used to pay creditors. Obviously losing that ability would not be beneficial to creditors or the debtor.
Informal arrangements have their problems, but these can be reduced or eliminated if they are set up and documented properly. The first consideration is that they would be very difficult to set up with more than a few creditors. It would not be practical to try to get consensus between 100 creditors.
Other issues include:
- All creditors must agree to and execute a deed. Any creditor that does not agree to the agreement can continue collection proceedings and disrupt the entire process.
- There is no statutory provision to rely upon if the debtor does not comply with the agreement.
- Any unpaid portion of the debts is not automatically released at the end of the agreement.
(i) if there are only very few creditors and they all are willing to compromise to settle their debts – and
(ii) if the debtor is willing to have an independent person (the equivalent to a trustee) control the agreement – and
(iii) if the agreement is properly documented with appropriate clauses:
there is no reason why debtors could not use informal arrangements to satisfy debts while protecting credit ratings and other registrations or requirements needed to allow continued employment.