Bankruptcy: Exploring The Section 73 Proposal

For those experiencing the unfortunate burden of bankruptcy, an arrangement made pursuant to section 73 of the Bankruptcy Act 1966 (Cth), a ‘Section 73 Proposal’, is often a favourable outcome. A successful Section 73 Proposal allows for a person’s bankruptcy to be annulled prior to the (minimum) three-year statute-imposed period of bankruptcy to expire. A Section 73 Proposal is often a favourable alternative for creditors too, as they will be likely to receive a better return than they would in bankruptcy, within a shorter period of time.

A Section 73 Proposal may take many forms, but it is made to a bankrupt’s creditors and typically involves a compromise being reached whereby a fund of money (not otherwise available to the trustee in bankruptcy) is offered to the creditors. The funds included in a Section 73 Proposal can be provided by third parties such as family, friends, or any other interested parties.

Initiating the Proposal

In order to initiate a Section 73 Proposal, you must first lodge with your Trustee, a proposal signed in writing setting out the terms of the proposed composition or arrangement, including the particulars of any sureties or securities that form part of that proposal. The Trustee must then, within 2 business days of receiving the Section 73 Proposal, provide a copy to the Official Trustee.

You are entitled to propose that a person other than your current Trustee act as the Trustee of your composition or arrangement pursuant to section 73B of the Act. The proposed Trustee will be required to provide a written declaration, stating whether any relationship exists between them and yourself, and provide copies of this to the Official Trustee, and the current Trustee of the bankrupt estate.

The Meeting of Creditors

After receiving the Section 73 Proposal, the Trustee must then call a meeting of creditors in accordance with Section 75-175 of the Insolvency Practice Rules (Bankruptcy) 2016. The Trustee must also send to creditors at least 5 business days before the day of the meeting, copies of:

1. the proposal, and a report on the proposal;
2. a copy of the debtor’s statement of affairs if the meeting is the first meeting of creditors held during the administration of the estate; and
3. if an alternate Trustee is to be appointed pursuant to section 73B applies, a copy of the declaration disclosing any relationship with that Trustee.

The Trustee’s report on the proposal must:

1. indicate whether the proposal would generally benefit creditors; and
2. name each creditor who has identified themselves as a related entity of the debtor in the debtor’s statement of affairs.

When making their recommendation on the proposal, the Trustee will take into account the anticipated assets available to be realised for the benefit of creditors if you remain in bankruptcy compared to the funds that will be available to creditors under the proposal.

The Trustee’s report must also include:

1. the origin of the funds being provided as part of the composition or arrangement;
2. particulars of any assets, realisations and dividends paid;
3. an estimate of the dividend payable to creditors;
4. details of the bankrupt’s personal business activities;
5. details of the bankrupt’s conduct before and after bankruptcy; and
6. details of any relationship between the debtor and the Trustee.

The Trustee is entitled to seek, pursuant to section 75-175(2B) of the Rules, that the debtor provides funds that are sufficient to cover:

1. the estimated costs that will be incurred by the Trustee in arranging and holding the meeting;
2. the estimated remuneration payable to the Trustee in respect of the meeting.

Where the proposal fails to make adequate provision for the Trustee’s accrued remuneration owing at the time of the proposal, the Trustee may refuse to call the meeting of creditors. To avoid this, appropriate enquiries must be made with the Trustee prior to finalising the proposal in order to properly account for any remuneration owing to them.

It is also important to note that the Australian Financial Security Authority (AFSA) will receive a realisation charge of 7% on money received by the Trustee with respect to a Section 73 Proposal (further note that this charge may fluctuate). This levy is imposed by AFSA in order to fund the costs of certain activities undertaken to benefit the personal insolvency system.

Accepting the Proposal

A Section 73 Proposal must be accepted by way of a special resolution of creditors. The requirements of a special resolution of creditors are provided for in section 75-132 of the Rules. A special resolution will be passed where:

1. a majority of the creditors voting in the meeting vote in favour of the resolution; and
2. at least 75% in the value of creditors voting in the meeting vote in favour of the resolution.

If the proposal fails to satisfy either of the above, the special resolution will not be passed.

In accordance with section 74 of the Act, if the Proposal is accepted by special resolution of creditors at a meeting held in accordance with the Rules, the bankruptcy will be annulled. The Trustee is then required to lodge a notice with the Official Trustee setting out those details. It is important to note that pursuant to section 74(6) of the Act, all sales and dispositions made by the Trustee during their appointment are deemed to have been validly done, notwithstanding the annulment. Section 74A of the Act enables variations to be made to the proposal, however only with your written consent.

Effect on Creditors

Once accepted, the proposal is binding on all creditors with respect to their provable debts in accordance with section 75(1) of the Act. It will not release you from any debts which would not have otherwise been discharged at the conclusion of bankruptcy. These debts include those occasioned by fraud, or those arising from any statutory penalties.

Creditors are, in limited circumstances, able to seek to set aside and terminate a proposal even if it has been accepted by a special resolution of creditors. The grounds upon which a creditor may seek to do so are prescribed by section 76B of the Act, and are based on the same principles as an application to set aside a personal insolvency agreement, including:

1. that the terms of the agreement are unreasonable or otherwise not calculated to benefit the creditors generally;
2. that there has been non-compliance with the process leading up to the agreement, or the agreement does not comply with the Act; and
3. that the debtor has given false or misleading information or omitted a material particular from their statement of affairs; and
4. for any other reason. 

If you, or anyone you know, is bankrupt and seeking an alternative to the fixed three year bankruptcy period, please contact our team of specialist insolvency and bankruptcy lawyers at Cronin Miller Litigation to discuss further.