Most bankruptcies end on the discharge of the bankrupt three years after the statement of affairs is filed. A bankrupt may be annulled at any time if sufficient funds become available to pay all debts and costs. Occasionally a bankrupt will use section 73 of the Act to annul their bankruptcies. This is a useful section, but under utilized and sometimes not used well.
For the uninitiated, section 73 of the Bankruptcy Act has been a part of the bankruptcy system for some time, and allows bankrupts to make formal proposals to their creditors to settle debts and have the bankruptcy annulled. The creditors decide whether the proposal is acceptable and, if accepted by special resolution, the bankruptcy is annulled and is replaced by a formal arrangement.
Note: The creditors can only accept the proposal by special resolution. This is more than 75% in dollar value AND more than 50% in number voting for the proposal. Without both amounts voting in favour, the proposal fails. There is no casting vote by the president of the meeting or the trustee.
The proposal is meant to replace the bankruptcy, so creditors will want more under the proposal than they would be likely to get in the bankruptcy. This may not be difficult as many bankrupt estates return nothing to creditors. However, this is not the only factor creditors consider.
Some bankrupts have been less than honest or up-front with their creditors or the trustee. They have attempted to hide assets, been uncooperative or generally irritated creditors to such an extent that some will simply not vote for a proposal that will see the bankruptcy annulled. This emotional response, warranted or not, has to be taken into consideration when forming a proposal. Some institutional creditors have internal policies that dictate whether proposals should be accepted. These creditors may need certain terms included in the proposals.
Almost anything may be proposed to creditors, but there are some generally accepted guidelines:
- The greater the return, the greater the likelihood of acceptance. Money talks.
- The shorter the time period, the greater the likelihood of acceptance. Money now talks loudest.
- Provision of some form of security or third party guarantee will increase creditors’ confidence that the proposal will be fulfilled. Security builds confidence.
- Adequate information on how payments will be funded will increase creditors’ confidence that they will be made. Information builds confidence.
There are some statutory factors built into section 73 and related sections. Bankrupts will have to consider three other points.
- The amount to be paid under the proposal will have to provide for the outstanding approved fees of the trustee, or the trustee can refuse to call the meeting.
- The trustee must complete relevant enquiries into the estate so that he or she may make a considered recommendation to creditors. Bankrupts should not try to use proposals to stop trustees from making enquiries. The trustee may delay the calling of the meeting until those enquiries are complete.
- The trustee will usually ask for a payment to be made to cover the costs of calling the meeting.
Most bankrupts would like to end their bankruptcy sooner rather than later and these provisions provide one avenue to do so. However, it is not as simple as offering a few cents in the dollar and expecting everything to work itself out.
Bankrupts should ensure that any money or assets that will be paid under the proposal are actually available, and not just a hope. They should propose to pay money as soon as possible. Having a third party attend the meeting with a cheque in hand for the full amount may sway undecided voters. Bankrupts should ensure that they can show that all payments schedules can be met, they have provided adequate security or guarantees. They should also be prepared to discuss the proposal with any creditor that has questions about the estate and be able to ‘sell’ the proposal.