What is a Section 73 Proposal?

Section 73 Proposal – Annulment of Bankruptcy

Fortunately there are provisions within the Bankruptcy Act that enable bankrupt to have their bankruptcy annulled through a Section 73 proposal.

The repercussions of creditor’s claims can often result in bankruptcy, regardless of whether or not it was the individual’s choice to enter bankruptcy or if it was filed by a creditor. However, bankruptcy is far from the end of the world for the person who undergoes it.

Insolvency Guardian can refer you to a trustee or a person that will be able to offer you assistance in dealing with a Part X or Section 73 Proposal, as they are within the Bankruptcy Act.

This gives the individual an opportunity to have a ‘clean slate’, free from all debts accrued at the time of bankruptcy.

Rather than following the natural course of bankruptcy over 3 years or more, which could result in a catastrophic credit record and a painful procedure, a Section 73 proposal is an approach where “everybody wins”.  Please read carefully our “About Bankruptcy” pages, which explain that once a bankruptcy is annulled, your credit rating may be restored to that of before the bankruptcy, however it will remain on the National Personal Insolvency Index forever.

As your Insolvency Guardians, we exercise the best possible course of action for you to get back up and running, eliminating residual effects and hindrances of past financial situations to give you the best possible result.  This means that we will handle your bankruptcy and bring in experts to work with you from the start to annul your bankruptcy.

Bankruptcy needn’t be the end of the world and indeed it can be the springboard for a whole new start!

Explanation of the ‘Composition to Annul a Bankruptcy’

Section 73( 1) of the Act states as follows:

73(1) [Trustee’s proposal] Where a bankrupt desires to make proposal to his or her creditors for:

(a) composition in satisfaction of his or her debts;

(b) a scheme of arrangement of his or her affairs;

He or she may lodge with the trustee proposal in writing signed by him or her setting out the terms of the

proposed composition or scheme of arrangement and particulars of any sureties or securities forming part of

the proposal.

 Section 73 allows a bankrupt to make a proposal to his or her creditors for either a composition or scheme of arrangement, which, if accepted, will allow for the termination of the bankruptcy.

Composition means an arrangement where the creditors agree to accept in full settlement, a payment less than full payment of all debts. The payment offered under the proposal may be immediate or over a period of time .

Effect of Approval of the Proposal by Creditors

For a proposal to be accepted by creditors, it requires, pursuant to Section 73(4) of the Act, the passing of a special resolution. A special resolution is defined by Section 5 of the Act as:

“a resolution passed by majority in number and at least three-fourths in value of the creditors present personally, by telephone, by attorney or by proxy at the meeting of creditors and voting on the resolution”

The effect of acceptance of the proposal for the composition is that the proposal is binding on all creditors who have provable debts due to them from the bankrupt (Section 75), except that:

• The bankrupt is not released from a provable debt due to a creditor that would not be released by the bankrupt’s discharge from bankruptcy (unless the creditor consents), and

• Approval does not release any other person (that is, other than the bankrupt) from any liability that would not be released by the discharge of the bankrupt, for example: a guarantor of the bankrupt’s liabilities.

The terms of the composition are enforceable by the Court, upon the application of any interested person, and disobedience to any such order of Court is seen as contempt of the Court.

All sales and dispositions of property, payments duly made and all acts done by the Trustee or any person acting under the authority of the Trustee or the Court before the annulment, shall be deemed to have been validly made or done; however, subject to Section 74(7) of the Act the property of the bankrupt still vested in the Trustee vests in such person as the Court appoints or, in default of such an appointment, reverts to the bankrupt for all his or her estate or interest in it, on such terms and subject to such conditions (if any) as the Court orders.

Where the law of the Commonwealth (or of a state or territory of the Commonwealth) requires the transmission of property to be registered, any such property vested in the Trustee at the time of the annulment of the bankruptcy, notwithstanding that it vests in equity in such person as the Court appoints or in the bankrupt, does not vest in that person or the bankrupt at law until the requirements of that law have been complied with (Section 74(7)).

Subject to any bona fide dispositions lawfully made by the Trustee prior to annulment and subject to any condition that the Court may by its annulment order impose, the bankrupt is restored to his/her pre-bankruptcy position. The property of the bankrupt vests in the person the Court appoints or in default reverts to the bankrupt.

The criminal liability of the bankrupt will not be affected by the acceptance or approval of a composition or scheme of arrangement under Pt IV (or by a discharge or annulment) as he or she may still be prosecuted for offences (Section 275).

The composition or scheme of arrangement may be terminated or set aside by Order of the Court upon application of the Inspector-General, the Trustee or a creditor.

Varying Composition or Scheme of Arrangement

Creditors with the written consent of the former bankrupt can vary the terms of a composition or scheme of arrangement by passing a special resolution setting out the changes. The former bankrupt can also make a request in writing to the Trustee to vary the terms of an existing composition or scheme of arrangement.  The Trustee sends out a notice to the creditors outlining the changes to the existing composition or scheme of arrangement. If no creditor objects to the changes by responding in writing then the variations to the terms can be made.

The Trustee needs to provide creditors with ten days notice in which to consider the variation, the impact of the variation, when the variation will take effect (minimum of fourteen days after the date the notice was given) and stating how creditors can object. A creditor needs to advise the Trustee in writing of any objection to the variation.

The Trustee must receive the creditor’s written notice of objection within two days prior to the expiry of the ten day time period. In the event a creditor objects to the variation of terms, the Trustee is required to call a face to face meeting of creditors to consider the proposed amendment to the existing proposal.

Terminating Composition or Scheme of Arrangement

There are a number of ways in which a composition or scheme of arrangement can be terminated: by the Court, by a special resolution of creditors, by a default in meeting the terms of the agreement or by a specified event outlined in the agreement.

A Court can set aside the agreement upon application, where it is apparent that the composition or scheme of arrangement:

• Includes terms and conditions that are unreasonable and do not provide an equitable outcome to creditors;

• Does not comply with the Act or Bankruptcy Regulations; or

• Has been based on false or misleading information.

In any of these circumstances, the Court can make a Sequestration Order against the former bankrupt and the former bankrupt becomes a bankrupt.  The Trustee, if he is satisfied that a former bankrupt has defaulted on the terms and conditions, can have the composition or scheme of arrangement terminated by:

• Sending written notice to each creditor detailing the reason for the termination and creditors not objecting to the termination; or

• Calling a special meeting of creditors to consider the termination and creditors resolve by ordinary resolution to terminate the agreement.

Where the composition or scheme of arrangement contains specified terminating events that will automatically cause a termination (for example, breach of terms, likely injustice through delay in realisation of assets, or inability to realise), then the composition or scheme of arrangement will be terminated.

Creditors can pass a special resolution terminating a composition or scheme of arrangement.  Creditors will need to take fresh proceedings in the Court where the former bankrupt’s composition or scheme of arrangement has been terminated by the streamlined correspondence method, by creditors passing an ordinary resolution or triggered by a special event in the composition or scheme of arrangement. Where an application to the Court has been made to terminate the composition or scheme of arrangement, the Court can make that determination without need for fresh proceedings.

Setting Aside a Composition or Scheme of Arrangement

Once a composition or scheme of arrangement is in force the Court may (upon the application of the Inspector-General, the Trustee or a creditor) set the composition or scheme of arrangement aside if it is satisfied that:

• The terms of the composition or scheme of arrangement are unreasonable or are not calculated to benefit creditors generally;

• The composition or scheme of arrangement was not entered into in accordance with the provisions outlined in Act;

• The composition or scheme of arrangement does not comply with the requirements of the Act; and

• The composition or scheme of arrangement has been based on false or misleading information. 

  • Where it is apparent that the composition or scheme of arrangement substantially complies with the requirements of the Act, the Court cannot set aside the agreement. No application can be made to set aside a composition or scheme of arrangement where the terms and conditions of the agreement have been discharged.

In certain circumstances the Court can make ancillary orders as it thinks fit, or order compensation to be paid by a person to another person as specified in the Order. Where applicable, the Court can dispense with service of the former bankrupt of a notice of application to terminate the composition or scheme of arrangement unconditionally or with conditions.

Validity of acts upon termination or setting aside of a Composition or Scheme of Arrangement

Pursuant to Section 768 of the Act, all payments made, actions taken and transactions entered into in good faith under or for the purposes of the agreement by the Trustee or another person before being notified of the termination or setting aside of the agreement are valid and effectual. These ‘actions’ transactions are unable to be set aside by the Trustee of a later composition or scheme of arrangement or subsequent bankruptcy.

Information related above may have been sourced from Government websites, namely the Insolvency Trustee Services Australia, in order to best educate you on Bankruptcy and the alternatives.