PIAs can lead to a quicker and higher return to creditors
It is well-known that companies in financial crisis have options to deal with insolvency, such as voluntary administration and Deed of Company Arrangements. But it is lesser-known that a similar mechanism is available to individuals.
Part X (part 10) of the Bankruptcy Act allows an individual (the debtor) to enter into a binding arrangement with their creditors to avoid bankruptcy. The arrangement is called a personal insolvency agreement (PIA).
Some advantages for the debtor are:
- they get immediate relief from their debts
- they avoid some of the restrictions and stigma of bankruptcy
- the PIA binds all creditors, including those that voted against the proposal
- that only property offered in the proposed PIA is available to creditors.
Some advantages for the creditors are:
- an independent insolvency specialist reviews the debtor’s affairs and assesses the likely returns under bankruptcy and under the proposed PIA
- the PIA should provide a higher dividend than in a bankruptcy
- the dividend is often paid much sooner
- costs of administering a PIA are usually much less than the costs of a bankruptcy
At Worrells we administer approximately 400 PIAs nationally at any one time.
In one case, ‘Mr B’ fell into financial stress following some unsuccessful property developments, despite his significant income as a civil engineer.
Mr B attempted to make informal arrangements with his creditors, but was unable to win their complete support—meaning that any dissenting creditor could apply to court to bankrupt Mr B. To avoid such action, he appointed a controlling trustee under Part X of the Bankruptcy Act and proposed a PIA.
Mr B’s proposed PIA offered an immediate lump sum payment from a third party. Further, some related creditors would not participate in the dividend under the PIA—meaning funds would be distributed to a smaller pool of creditors than in a bankruptcy scenario.
We investigated Mr B’s affairs and prepared a detailed report to creditors outlining the estimated returns under the proposed PIA and under a bankruptcy.
In a bankruptcy, Mr B would have to contribute 50% of his after-tax income, above a statutory threshold, for the three-year bankruptcy term. A small dividend would be paid in the bankruptcy scenario, but it would have been paid over three years and spread across a larger creditor pool.
Under a PIA the dividend rate was higher, partly due to the lower costs of administering the PIA and the pool of participating creditors being smaller. Further, the dividend would be paid immediately, rather than over three years.
A meeting of Mr B’s creditors was held to vote on his proposed PIA.
The threshold for acceptance of a PIA is high (a majority in number of creditors voting and 75% of the value of debts is needed) and in this case the creditors met the threshold and as a result Mr B’s proposal was accepted.
The Part X process, while lesser-known, is a useful solution for individuals who are unable to manage their debts. It also often produces a quicker and higher return to creditors in contrast to bankruptcy.