McDonald Vague The Insolvency & Business Recovery Specialists

Personal insolvency - Part 5 proposals

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A Part 5 Subpart 2 proposal under the Insolvency Act 2006 gives a debtor an alternative to bankruptcy.  If the proposal succeeds, then the insolvent is bound by the proposal and does not have to comply with the usual provisions of a bankruptcy.  For example, the debtor may carry on in business and have more than one bank account, and is not prevented from leaving the country.

Proposals are called Part 5 proposals because they fall under Part 5 Subpart 2 of the Insolvency Act 2006.  The person who is subject to a proposal is called "the insolvent."

A proposal is in effect a contract between a debtor and his or her creditors.  The insolvent may put an offer to his or her creditors.  If the creditors agree to the offer with a requisite majority, and the Court approves the proposal, then so long as the debtor fulfils his or her obligations under the proposal that is the end of the matter.

During the course of the proposal no creditor may take any action against the debtor to make the debtor bankrupt, and at the end of the proposal residual debts, if any, are extinguished.

Legislation

The legislation applying is as follows:-

• Insolvency Act 2006
• The Insolvency (Personal Insolvency) Regulations 2007
• The High Court Rules, Part 24

What may be in a proposal

Section 326 of the Insolvency Act 2006 states as follows:-

1. An insolvent may make a proposal to creditors for the payment or satisfaction of the insolvent's debts.
2. A proposal may include all or any of the following:-
   1. an offer to assign all or any of the insolvent's property to a trustee for the benefit of the creditors:
   2. an offer to pay the insolvent's debts by instalments:
   3. an offer to compromise the insolvent's debts at less than 100 cents in the dollar:
   4. an offer to pay the insolvent's debts at some time in the future:
   5. any other offer for an arrangement for the satisfaction of the insolvent's debts.
3. The proposal may include any other conditions for the benefit of the creditors and may be accompanied by a charge or guarantee.

The procedure

A proposal is drafted.  To this is attached a statement of assets, debts and liabilities of the insolvent and a background statement.  This statement is verified by affidavits.

• The proposal is signed by the insolvent and also by some person willing to act as trustee for the creditors
• The proposal is then filed in the High Court
• Upon the filing of the proposal, the trustee named in the proposal becomes the provisional trustee and has an obligation to forthwith call a meeting of creditors by posting to every known creditor, at their last known address;
  • Notice of date, time and place of meeting
  • Statement of the assets and liabilities of the insolvent
  • A copy of the proposal
  • A formal proof of debt
  • A voting letter in the prescribed form

Meeting of creditors

The next step is there is a meeting of creditors at which the provisional trustee is the chairperson, unless creditors elect their own chairperson.

The creditors have a right to examine the insolvent and may accept the proposal or may ask for modifications to the proposal.  Any such modifications have to be agreed to by the insolvent.

Voting at meeting

The resolution to approve the proposal is decided by a majority in number and 75% in value of those creditors who vote.  The same majority is required for any modifications to the proposal.

Approval of proposal by the High Court

Upon acceptance of the proposal by the creditors, the trustee completes detailed minutes and then applies to the Court for approval of the proposal.  It is the Court that approves the proposal - not the creditors.

The Court, however, has no power to approve the proposal unless the necessary threshold has been met.  A notice of the Court hearing is sent by the provisional trustee to the insolvent and to every known creditor.

The Court, before approving a proposal, will hear any objection that might be made by or on behalf of any creditor.  If the proposal is in order, the Court will usually approve the proposal.  An approved proposal is binding on all creditors listed in the proposal, not just those who voted.

The Court has no power to approve the proposal if the proper procedure has not been followed.  The Court also has discretion not to approve the proposal on various grounds.  The most common ground would be that the terms of the proposal are not reasonable or are not calculated to benefit the general body of creditors.

Variations from normal insolvency law

The law regarding the Part 5 proposal differs in many ways from the law applying to normal insolvency matters.  For example; in a Part 5 proposal preferential creditors are not entitled to vote.  In other insolvency procedures (liquidation or compromise), preferential creditors are entitled to vote.

Also, secured creditors are allowed to vote for the full amount owing to them.  Under normal insolvency law, secured creditors must first deduct the value of their security.

General comments

For a Part 5 proposal to succeed the following elements must be present:-

• There must be some goodwill between the debtor and his or her creditors
• The provisional trustee and the solicitor involved must be able to work effectively with each other
• Creditors must be convinced that the Part 5 proposal will give them a better result than if the insolvent were to be adjudicated bankrupt

Conclusion

Part 5 proposals can be very effective:-

• They can enable a person to continue to be self-employed
• They can enable creditors to get back more than would be achieved in a bankruptcy
• They can enable creditors to get continuing work from the debtor

In short, a good Part 5 proposal will benefit both the debtor and the creditor.

Please also see our further article on this topic 'An alternative to bankruptcy - Part 5 proposals'

DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.