Last quarter’s personal insolvency statistics showed a marked and continued decline in the number of Part X agreements (now called Personal Insolvency Agreements) being accepted by creditors. We do not have the number of section 188 authorities (the start of the Part X process) executed during this time to know whether the drop is related to a decrease in proposals being made, or a decrease in acceptances of proposals. We also do not know the number of estates that would have been Part X’s had the Part IX provisions not been introduced some years back.
Undoubtedly there are a number of estates that now go through the Part IX process, but these are only the small estates. Part IX was set up to allow a quick and less expensive processing of smaller insolvent estates, leaving the larger insolvent estates to go through the more detailed examination processes under Part X.
The aim of the Part X provisions is still to resolve an insolvent debtor’s financial affairs without the need for bankruptcy. The process has not changed significantly in the past years. Certainly there have been a number of procedural changes, but none of these would cause a decrease in the number of Part X proposals being made or accepted. Proposals are still subject to examination, a report is still issued to creditors who will compare the alternate returns, trustees still give advice on potential recoveries in a bankruptcy, and creditors still vote by special resolution.
So how can debtors propose an agreement that has the best chance of being accepted? Part X proposals are very similar to section 73 proposals, with one major exception. A section 73 proposal is made during the bankruptcy, and usually after the trustee has conducted months of investigation in the bankrupt’s affairs.
A Part X proposal is made without that extended time period (the meeting having to be called within 25 business days of the 188 authority being executed by all parties). The controlling trustee – the trustee between the 188 authority and the acceptance or rejection of the proposal – has a limited time period to conduct investigations, and creditors have limited time to provide the trustee with information. There is more ‘faith’ involved in a Part X proposal than in a section 73 proposal.
What can a debtor do?
The guidelines are the same as for section 73 proposals. Almost anything can be proposed, it just needs to make sense and be believable.
- The greater the return to creditors, the more likelihood of acceptance. Creditors wish to maximize their return.
- The shorter the time period before the money is paid, the greater the likelihood of acceptance. Now is better that later.
- The more security (registered mortgages, bills of sale etc) and guarantees provided, the more confidence the creditors will have that the agreement will be completed. Creditors rightly believe that if the debtor and their family do not believe strongly enough in the proposal that they will not stand by it with securities and guarantees, it should be treated with caution.
- Early provision of information about the proposal and how it will be met, and the estate in general. Unlike a section 73 proposal, the trustee does not have a lot of time to conduct investigations and therefore may not be able to provide a positive recommendation to creditors without that information. Provision of information as early as possible will increase everyone’s confidence.
Ultimately creditors will decide on whether to accept or reject a proposal, so they need to be able to understand it easily (that is, it should not be too complicated and have too many contingencies) and they need to have faith in the debtor and the proposal. The debtor should be prepared to sell the proposal at the meeting of creditors. Debtors that have annoyed or lied to creditors in the months leading up to the proposal being made face a more difficult battle.
In the end most creditors are realistic and will accept the curse of action that will give them the best return in the shortest time. As long as that point is covered, the proposal is in with a fighting chance.