Personal insolvency


01 May 2023

What are personal insolvency agreements and how can they help?


6 min

A potential alternative to bankruptcy.

The options available to companies in financial difficulty have largely been the focus recently. Particularly, with the recent success of small business restructuring (SBR) designed to help small businesses avoid liquidation, which is available to companies with less than $1 million in debt (along with other criteria). And for companies that don’t qualify, the voluntary administration regime is available. This article looks at the parallel position for people who want to avoid bankruptcy for personal insolvency issues.

The Bankruptcy Act 1966 provides two options: 

  1. Part IX (9) debt agreement is a legally binding agreement between a person and their creditors. Unlike option two, a Part IX debt agreement does not require a controlling trustee to be appointed over the individual debtor’s estate. Income and debt eligibility criteria[1] restricts who can propose a debt agreement, and consequently they’re not appropriate for everyone.

  2. Part X (10) personal insolvency agreement (PIA) is discussed in detail below.

What is a Part X agreement?

A PIA is a legally binding agreement between an individual and their creditors. Typically, a PIA compromises an individual’s debts to give a more attractive return to creditors than if the debtor became bankrupt. PIAs allow flexibility with how debts can be compromised, such as contributing a lump sum, paying instalments over time, the sale of assets, or another suitable arrangement. For example, certain creditors may agree not to participate for a dividend, thereby increasing the return to participating creditors given the reduced creditor pool (compared to the alternative of bankruptcy).

How can somebody propose a Part X agreement? 

Before proposing a PIA, the debtor must first appoint a controlling trustee (like the registered bankruptcy trustees at Worrells). A controlling trustee’s role is to: 

  • Identify, control, and determine the prospective value of the debtor’s assets. Unlike in bankruptcy, a controlling trustee will not realise (sell) the debtor’s assets, unless that is a term under an accepted PIA.

  • Investigate the debtor’s affairs, including identifying any transactions that may be voidable under relevant provisions of the Bankruptcy Act. A controlling trustee must consider these transactions to estimate the hypothetical return should the debtor become bankrupt.

  • Recommend whether creditors should accept the proposal by comparing the likely returns to creditors from the PIA and a hypothetical bankruptcy scenario.

The controlling trustee will detail their findings and recommendations in a comprehensive report to the debtor’s creditors. 

Meeting of creditors 

The controlling trustee must convene a meeting of the debtor’s creditors to consider the debtor’s proposal, which must be held no more than 30 business days after the controlling trustee’s appointment date. At that meeting, creditors will resolve one of the following: 

  1. To accept the PIA.

  2. That the debtor’s assets no longer be subject to the controlling trustee’s control.

  3. That the debtor presents a debtor’s petition within seven days of the meeting’s conclusion to become bankrupt.

To be accepted, the PIA requires a special resolution, being a majority in number and at least 75% in value of the creditors present at a meeting of creditors and voting on the resolution.

If the PIA is accepted, the controlling trusteeship will end, and all parties will be bound by the PIA’s terms.

If creditors resolve the option two above, all parties will revert to their previous position before the controlling trustee was appointed. Control of the debtor’s assets will revert to them, and the debts the debtor tried to compromise will remain due and payable.

The third resolution is a request by creditors for the debtor to declare bankruptcy. The debtor does not automatically become bankrupt upon this resolution passing, nor are they obliged to file a debtor’s petition. However, the debtor’s assets will remain subject to the controlling trustee’s control until either the debtor becomes bankrupt, four months pass since the controlling trustee’s appointment, or the court releases the assets from control. The debtor only becomes bankrupt if they voluntarily complete a debtor’s petition, or the court makes a sequestration order. 

What debtors and advisors should be aware of

Debtors should be aware that just because a PIA may appear to offer a better return to creditors than bankruptcy, it does not mean creditors will accept it. 

Where the Australian Taxation Office (ATO) is a major creditor, we have seen it consider public interest grounds, such as the debtor’s historical compliance with their tax obligations, including whether outstanding returns are up to date at the time of the proposal. To give this some context, in a recent matter handled by Worrells’ Melbourne office, the debtor had not completed their tax returns for over 20 years. The ATO, being the major creditor, rejected the PIA because of this lack of historical compliance and instead resolved for the debtor to file a debtor’s petition. 

Debtors should also be aware of the PIA’s consequences: 

  • Proposing a PIA is an act of bankruptcy, and a creditor can file a creditor’s petition against the debtor if the PIA fails.

  • The debtor cannot manage a corporation until the PIA is fulfilled, meaning they will need to resign as a director of any companies they’re appointed to.

  • They may need to reapply for any licences they hold, such as a real estate agent’s licence.

  • The debtor’s details will be shown on the National Personal Insolvency Index (NPII) permanently.

  • The PIA will appear on the debtor’s credit file for up to five years, and in some cases longer.

If you or somebody you know is having financial difficulties, Worrells can help you understand the options available. For an obligation and cost-free discussion, contact your local Worrells principal.

[1] Indexed amounts | Australian Financial Security Authority ( 

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