If you’re having trouble paying bills, suppliers and staff, bankruptcy is not the easy way out. Lets take a close look at your options and how you might be able to turn things around.

Financial difficulties can arise from bad luck as much as bad management. In the construction industry for example, the main creditor might be paid for a large building project, but the painter or decorator will only be paid at the end of the job which can cause flow-on effects and real financial hardship.

Yes, being declared bankrupt will clear most of your debts and get your creditors off your back, but you will still be responsible for Court ordered fines, as much repayment as is possible, child support and your own expenses.

The effects of bankruptcy can last for at least seven years,  - three years from filing your statement of assets and liabilities and a further four years credit agency records - during which time someone else will be in control of your estate, your credit rating will be reduced, and restrictions are placed on where you can travel and work.

So if you can't pay your debts, what are your options?

Be Up Front

Talk to your creditors in the first instance and let them know there is an issue. Odds are they would prefer you remain in business to repay them in full, instead of declaring bankruptcy which would force them to chase you for the rest. Sit down with them and try and work out a repayment plan.

Summary Instalment Order (SIO)

An SIO is a formal arrangement between you and your creditors to repay all, or an agreed part of your debts over time. To apply, you must have a surplus in your budget, be able to make some repayments and have unsecured debts under $47,000. You need to apply and nominate a Summary Instalment Order Supervisor who will check your application, keep in touch with all your creditors and ensure the terms of the Order are being followed. See the list of registered SIO supervisors on the Insolvency Services website.

Creditors Proposal

(Part 5, Subpart 2 Proposal, Insolvency Act 2006) 
This is another formal agreement that arranges a payment plan over a defined time period to settle your debts. It includes unsecured debts, some secured debts, and there is no limit on the amount of debt so long as you are able to make repayments and the requisite number and value of creditors voting on the proposal agree.

However, a Creditors Proposal must be approved by the courts, so you will need assistance from a lawyer or accountant when drafting the agreement. Once approved, it’s a binding agreement that prevents those named creditors from pursuing you further without the court’s permission - if the terms of the proposal are not being met.

No Asset Procedure

If you owe between $1000 and $47,000 in secured and unsecured debt and have no way of making repayments, a NAP is another alternative to bankruptcy. To be eligible you must never have previously been in a NAP or been declared bankrupt.

A No Asset Procedure is like a mini-bankruptcy. Some of the same restrictions apply, but for a shorter time period. Normally 1 year versus 3-7 years. A NAP will relieve you of your provable debt, but your creditors will remain unpaid.

Only after exhausting all these options should you consider bankruptcy. For more information on bankruptcy options, or any of these procedures or assistance with proposals and settlements please contact our team.

You can also download our FREE guide, Options for Companies in Financial Difficulty.

In the words of Fredrick Nael: “It takes both sides to build a bridge.”

An Alternative to Bankruptcy – Part 5 Subpart 2 Proposals

Insolvent individuals are often unaware that there are alternatives to bankruptcy and what the impact of those alternative options will be, so they are ill equipped to make informed decisions.

This article focuses on Part 5 Subpart 2 Proposals. There are other bankruptcy alternatives such as Debt repayment orders (DRO) formally known as the summary instalment orders (SIO) and no asset procedures (for debts less than $50,000) as well as informal settlements, none of which are discussed here.

Resolving personal insolvency issues using a Part 5 proposal requires the insolvent to put his/her best foot forward and the creditors agreeing to a concession and giving their support to the insolvent. The trustee brings it all together.

Background to Proposals

A Part 5 proposal is an option for an insolvent individual facing the prospect of bankruptcy to settle his/her debts. It is an opportunity for a person with significant personal debts to reach an agreement to pay his/her creditors in full or part by making a lump sum payment or advancing a deferred payment plan. A proposal must be approved by a majority in number that represents 75% in value of those creditors who vote on the proposal.

Some insolvents have the support of many creditors but face one aggrieved creditor who refuses to accept anything other than immediate payment in full, has a grudge, and is keen to advance bankruptcy proceedings for the sake of it. When you are facing bankruptcy because of one problematic creditor, you may be able to bind that one creditor with the support of the requisite majority of other creditors. It is not all doom!

Part 5 Case Study – Professional Advisor

I recently completed a Part 5 proposal for a financial advisor who was facing bankruptcy. His personal insolvency arose from serious ill health, which led to a loss of focus on his business and on maintaining his personal assets. His creditors, however, knew that he had been blessed with a full recovery to health and that, by supporting his proposal, he could continue to work as a financial advisor, earn a good income in future, and pay creditors a contribution towards their outstanding debts.

The creditors agreed the best outcome was to support the proposal and accept something instead of getting nothing. The alternative in bankruptcy would have been the end of a career and no return to creditors. The insolvent was able to borrow funds from his employer (borrowed against his future income) and contribute a lump sum to his creditors. The proposal was dealt with in less than three months and is now at an end. The result was that the creditors received more than they otherwise would have in bankruptcy. It was a “win/win” for everyone.

When Should Proposals be Considered

Proposals are not a good option for every insolvent person. Proposals require a financial outlay to cover the costs of the Court application for approval of the proposal and to cover the trustee’s costs in preparing them. They also require the support of the majority of an insolvent’s creditors. Avoiding bankruptcy is a significant incentive to some insolvent individuals, including where the insolvent’s career is at risk and when the individual clearly wants to repay what he/she can to his/her creditors in good faith.

Advancing Part 5 Subpart 2 Proposals

There must be advantages for both the insolvent and his/her creditors in a proposal arrangement or it will be a waste of time putting the proposal forward. A proposal must provide a better return to creditor than they would receive in bankruptcy.

The Advantages, in General Terms, of a Part 5 Proposal for the Insolvent are:

• avoiding the stigma of bankruptcy, the impact on your reputation, and the impact on family;
• avoiding the cost of defending bankruptcy proceedings;
• avoiding publicity of the insolvent’s insolvency (a proposal is between the insolvent and his/her creditors only);
• except in a few situations, property acquired after the filing of the proposal is not affected by the proposal;
• avoiding the restrictions faced by undischarged bankrupts, such as being required to provide information to the Official Assignee (“OA”) if changing address or job, not being able to leave New Zealand permanently without Court approval, or requiring a case managers’ approval to leave New Zealand for short time periods (personal or business);
• examinations of the insolvent are seldom conducted by the trustee; and
• the ability to be a company director and hold a management position in a family business.

The Advantages, in General Terms, of a Part 5 Proposal for Creditors are:

• avoiding the cost of Court proceedings;
• receiving a distribution from contributions made by third parties that would not be available to creditors in bankruptcy;
• receiving a greater recovery than what would be available in bankruptcy.

What Does the Insolvent Offer to his/her Creditors?

The proposed distribution to creditors usually comes from:

• funds advanced by family and friends;
• assets that would not be available to creditors in bankruptcy, for example, Kiwisaver entitlements (if approved), trust assets, assets subject to relationship property claims, funds borrowed specifically for distribution under the proposal
• contributions from future income to be paid over a period of up to five years rather than the normal three years;
• offering any windfall received for the duration of the proposal.

The insolvent’s family, friends, and related party creditors (who would be entitled to prove in the insolvent’s bankruptcy) can agree to subordinate their claims and not prove for their debts in the Part 5 proposal, which increases the return to the insolvent’s remaining creditors.

The Basic Rules when Seeking to Secure a Part 5 Proposal:

(i) Certainty of Return - creditors want certainty of a dividend. The creditor wants to know how much money they will receive as a dividend and when these dividends will be paid.
(ii) Certainty of Costs - the trustee’s costs need to be disclosed to creditors.
(iii) Disclosure - the insolvent must convince his/her creditors that he/she has disclosed all assets and interests.
(iv) Dollar Test - the insolvent must demonstrate that he or she has contributed the maximum that he or she can realistically contribute to the Proposal.

Is a Part 5 Proposal the Right Choice for You?

Bankruptcy can be the best option for an insolvent who has no ability to pay his/her debts and whose ability to provide for himself/herself and his/her family is not dependent on avoiding bankruptcy. For others, it is simply not feasible to offer a proposal.

Whether a Proposal is the right choice for you depends on:

• your ability to fund a proposal;
• whether you have the support of the requisite majority of your creditors;
• your ability to offer a sum to creditors that is more than they would receive in bankruptcy;
• your profession and your ability to secure future employment;
• the impact of bankruptcy on your employment; and
• the impact of the stigma of bankruptcy on you and your family.

In addition to any personal reasons, there are legal and practical reasons an insolvent may want to avoid bankruptcy:

• a bankrupt is obliged to attend any meeting that the OA requires him/her to attend;
• the OA can apply to have the bankrupt examined under oath;
• a bankrupt must immediately notify the OA of any change of name or address;
• a bankrupt must deliver to the OA all documents and papers in his/her possession that might relate to any of his/her assets, dealings, transactions, property, and/or affairs;
• bankrupts who practice in certain professions (for example: solicitors, financial advisors, real estate agents, and chartered accountants) cannot act as principals or hold the positon of director;
• bankrupts who have an income surplus after living expenses may be required to contribute that surplus towards payment of their debts;
• self-employment is not often an option (there are some exceptions);
• a bankrupt cannot act as a director of a company during his/her bankruptcy (there are some exceptions);
• the OA may investigate the financial affairs of an associated entity (company, partnership, person, or trust) of the bankrupt so far as they appear to be relevant to the bankrupt or to any of his/her conduct, dealings, transactions, property and affairs;
• the bankrupt’s bankruptcy must be disclosed to anyone to from whom the bankrupt applies for credit of $1,000 or more;
• transactions, gifts, or settlements that took place in the five years before the bankrupt’s bankruptcy will be examined;
• some employers require employees to disclose whether they are or have been bankrupt as do insurance companies; and
• the impact of the bankruptcy on the family home (this is a complex issue that will need to be considered by the insolvent before becoming a bankrupt).

I will end as I started. Dr Maya Angelou said: “You may not control all the events that happen to you, but you can decide not to be reduced by them.”

Part 2 of 2

 

Following on from our earlier article dealing with how liens over company records are treated in a liquidation, we will now cover how liens are dealt with in receiverships and bankruptcies, and how to handle a lien held over the assets of the entity.

Bankruptcy lien over records and documents

Upon the adjudication of a bankrupt all of their property is vested in the Official Assignee under Section 101 of the Insolvency Act 2006.  For those records that are not in the possession of the Official Assignee a written request is made for their surrender under Section 171 of the Insolvency Act 2006.  This request encompasses any document that relates to the bankrupt's property, conduct, or dealings that is in a third party's possession or under the control of a third party.

Failure to comply with a request made under Section 171 will likely result in a summons being issued for your attendance at an examination before the Official Assignee or a District Court Judge Court under Section 165.  There are no sections under the Insolvency Act that allow the holder of the records to charge for any expenses or disbursements incurred in providing the requested records.

What happens if you are owed funds by the bankrupt and hold a valid lien over records?

Section 172 of the Insolvency Act 2006 sets out that a person is not alowed, against the Official Assignee, to claim a lien over business records or a deed or instrument that belongs to the bankrupt.  However, a person may be a preferential creditor under Section 274(2)(f) provided they fall into the criteria set out under Section 172(2)(a)-(c).

Section 172(3) sets the total preferential claim as 10% of the total value of the debt, up to a maximum amount of $2,000.  The remainder of the claim will be recorded in the bankruptcy as an unsecured creditor's claim and will rank pari passu with the other unsecured creditors in the bankruptcy.

Where does your preferential claim rank in accordance with Section 274 of the Insolvency Act 2006?

The Official Assignee must follow Section 274 when making a distribution from the assets of the bankrupt estate that are not subject to a charge, as it sets out the order in which preferential creditors rank.  Below is a list of preferential creditors that rank ahea dof valid lien holders:

1. Fees and expenses of the Official Assignee;

2. Costs of the applicant creditor;

3. Costs incurred and the claim of any funding creditors from the assets protected, preserved or recovered;

4. Wages/salary, PAYE, holiday pay, redundancy pay, any other deduction that would form part of an employee's weekly wage (child support and student loan payments) up to $20,340.  For wages/salary and PAYE this is limited to what is outstanding in the four months before adjudication.

Once the debts of the above preferential creditors have been satisfied in full the preferential claim of the lien holder will be paid.

Receivership lien over records and documents

With the appointment of receivers over the assets of the company by a secured creditor, the powers that are granted to the receiver will be dependent on those outlined in the appointment documents prepared by either the secured creditor or the High Court depending on the method of appointment.

Section 14 of the Receiverships Act 1993 outlines that the receiver may inspect at any reasonable time, books or documents that relate to the property in receivership and are in the possession or under the control of the grantor in addition to those that are in the possession or under the control of a person other than the grantor.

What happens if you are owed funds by the company in receivership and hold a valid lien?

While the lien will allow you to have a form of security interest in the books and documents of the company these rights are not directly dealt with under the Receiverships Act 1993 like the Companies and Insolvency Act.  The receivers will often find themselves in the same situation as the company would be if they required the records.  They will often only have the option to settle the debt or wait for liquidators to be appointed over the company.

A lien over the assets of the entity and how it is dealt with

Upon the commencement of an insolvency procedure there are a number of potential liens that may be held over the assets of the entity.  This includes contractual liens which are dealt with as a security interest in accordance with the PPSA, common law liens and statutory liens.

Common law liens and statutory liens

From a creditor's perspective if you have supplied services over an asset that has added value you may have priority to receive payment ahead of other creditors, however it is important to maintain possession of the asset that you are claiming their lien over, whether it is a tradesman's lien or other form of lien.  Once you have released possession you have effectively eroded any leverage that you may have had and detrimentally affected their standing which will result in increased difficulty in negotiating favourable settlement terms between the parties involved.

It should be noted however that each lien should be dealt with individually on a case by case basis as no two sets of facts are the same and will likely have an effect on the outcome.

If you wish to discuss liens further please contact McDonald Vague for free and confidential advice to find out how we can help.

Part 1 of 2 

Having a customer go into liquidation is never appreciated.  There is a potential loss of profit, and as such, creditors generally seek to secure and protect their situation through whatever means necessary.

In a perfect world, the creditor will be secured by way of a perfected security interest under the Personal Properties Security Act 1999 that leads to gaining a super priority to recovery of equipment or to unpaid stocks and potentially a recovery from proceeds relating to those unpaid stocks.  However, often there is no security and no assets on liquidation.

On occasion, however, the creditor will find themselves in possession of company assets and records over which they have no registered security, and the question then arises, can they retain possession until the debt that they are owed is discharged?  This is essentially a lien.

This article forms part one of a two part series on liens that will cover how liens over company records are treated in a liquidation.  Part two will look at liens in receiverships, bankruptcies and liens over assets. 

Who has ownership of the company records?

Under the common law, a company that is not in liquidation will retain ownership of their records even when they are not in their possession. What this effectively means is that if a company chooses to change their accountant or solicitor they are able to simply uplift their records after settling any outstanding liens that may be held over the records.

Upon liquidation, the right to ownership of the company's records granted under the common law is transferred to the liquidators of the company through the powers set out in Section 260 and the Sixth Schedule of the Companies Act 1993. What this allows the liquidators to do is effectively stand in the shoes of the company when making requests and uplifting records of the company.

The Courts have held that a request made by a liquidator for records of the company is not limited to those records owned by the company but extends to all documents related to the dealings of the company. 

What if you have received a request for documents under Section 261 of the Companies Act 1993?

Ordinarily, a liquidator will make a written or verbal request, however, a liquidator is able to, under Section 261 of the Companies Act 1993, make a written statutory request against a director, shareholder or other persons to deliver to the liquidator such books, records or documents of the company as the liquidator requires within a specified timeframe.  Section 261(6A) provides that a person who fails to comply with a notice given pursuant to the section commits an offence and is liable on conviction to a fine not exceeding $50,000 or to imprisonment for a term not exceeding two years.  Following receipt of a Section 261 letter you will be entitled to make a request for payment of reasonable travelling and other expenses in order to allow you to comply with the Act under Section 261(6).  This section does not apply however to a director, shareholder or other party involved in the formation of the company. 

What happens if you are owed funds by a company and hold a valid lien?

Section 263 of the Companies Act 1993 sets out that a person is not entitled as against a liquidator to claim a lien over books, records or documents of the company.  However, if the lien arises from a pre-liquidation debt and you have control over the records, which are held or have been produced for the company you will be able to claim a portion of the debt as a preferential claim in the liquidation.

Section 263(2) sets the total preferential claim as 10% of the total value of the debt up to a maximum amount of $2,000.  The remainder of the claim will be recorded in the liquidation as an unsecured creditor's claim and will rank pari passu (side by side) with the other unsecured creditors in the liquidation. 

On what occasions will you not have to comply with Section 263?

There are a number of situations in which Section 263 will not apply, the first of these being where the company has entered into a compromise with its creditors.  The Court has determined that it will only apply when a company is in liquidation.

The next situation is when the company has been placed into liquidation via a shareholder's resolution or by way of the company's board in accordance with its constitution, but they have passed a resolution as to its solvency and would be considered a valid solvent liquidation.

Where does your preferential claim rank in accordance with the 7th Schedule?

The liquidators must follow Schedule 7 when making a distribution from the assets of the company that are not subject to a charge as it sets out the order in which preferential creditors rank.  Below is a list of preferential creditors that rank ahead of valid lien holders: 

  1. Fees and expenses of the liquidator;
  2. Fees and expenses of the administrator;
  3. Costs of the applicant creditor;
  4. Expenses of the liquidation committee;
  5. Costs incurred and the claim of any funding creditors;
  6. Wages/salary, holiday pay and redundancy pay of employees up to a statutory maximum of gross $20,340.

Once the debts of the above preferential creditors have been satisfied in full the preferential claim of the lien holder will be paid.

What does an accountant's lien cover?

An accountant's lien is by default limited to the records on which work has been completed and the resulting records from this work.  It does not however cover records that have not yet had work completed on them.

An accountant may have recourse to a general lien provided that the terms of engagement between the company and the accountant explicitly establish a right to exercise a general lien.

What does a solicitor's lien cover?

A solicitor's lien on the other hand is by default a general lien under the common law.

It is important to note however that solicitors are unable to claim legal professional privilege in relation to the documents of the company.  As outlined earlier, the liquidator effectively stands in the shoes of the company under the common law when making a request for documents in accordance with the powers granted to them under the Companies Act 1993.

Part 2 in this series will look at how liens are dealt with in receiverships and bankruptcies and will also look at the situation where a lien is held over the assets of the entity.

If you wish to discuss liens further please contact This email address is being protected from spambots. You need JavaScript enabled to view it. for free and confidential advice to find out how we can help.

 

 

 

 

The Insolvency Act 2006 was implemented on 3 September 2006, and created a new alternative to bankruptcy called the No Asset Procedure ("NAP").  This involves a one year term, rather than the usual three year term in bankruptcy.

 

The NAP is simply a once-off reprieve for the consumer type small-time debtor who has got out of their financial depth.  To qualify, the debtor must have no assets (except excluded assets - see below), total debts between $1,000 and $40,000, no means to repay any amount, and a clean financial record (not previously bankrupt and not previously admitted to the NAP).

 

Once admitted to the NAP, the debtor enjoys a moratorium on their debts; with some exceptions these cannot be enforced while the debtor is in the NAP.  If the NAP runs for 12 months, the debtor is discharged and the debts are cancelled (excluding student loans, child support and fines).  If the NAP terminates at any time before 12 months is up, the debtor's debts become enforceable once more.

 

Assets which may be retained by a bankrupt or a person subject to the NAP are as follows:-

 

  • Tools of trade - value at Official Assignee's discretion
  • Household furniture - value at Official Assignee's discretion
  • Motor vehicle - must not exceed $5,000 in value
  • Money -  up to $1,000

 

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.

Thursday, 01 December 2011 13:00

An alternative to bankruptcy - Part 5 proposals

When a person is faced with a bleak financial situation, bankruptcy may appear to be the only outcome. However, there are certain circumstances where this may not have to be the case. Part 5 of the Insolvency Act 2006 provides for alternatives for individuals facing bankruptcy - and the Subpart 2 proposal option can be very beneficial to affected parties.

Potential benefits of the Part 5 Subpart 2 proposal

As an insolvency practitioner with extensive experience in this area, I have acted as trustee for a large number of individuals and successfully negotiated terms with their creditors to the advantage of all concerned. I have found that the Part 5 Subpart 2 proposal option has become more popular for:

  • insolvent individuals who face significant personal guarantee obligations arising from the failure of an insolvent company, and
  • individuals who face bankruptcy proceedings and do not wish to face the restrictions involved in bankruptcies which include the inability to act as a director of a company, the loss of control of financial affairs, and restrictions to international travel let alone the stigma attached to bankruptcy.

Outcome of the proposal

The proposal must offer an outcome that would be better for creditors than that achieved in bankruptcy. The offer requires funding, which can be from any number of sources, including future earnings, third party lenders and existing assets. The formal proposal documentation is required to set out the offer to creditors, and provides for unsecured, preferential and secured creditors. The preferential creditors are required to be paid in priority to all other debts to the extent of such preference defined by the Insolvency Act 2006.

The proposal itself records a commitment to pay off a percentage of debt and can be either by way of an upfront lump sum payment shared pro-rata amongst creditors (after taking into consideration the priority provisions of the Insolvency Act 2006) within a short time period (usually timed within a fixed time period from date of High Court approval) or can be payable over time.

The proposal offer is a full and final settlement of all personal debts and obligations. It is a way for an insolvent person to reach a formal agreement that enables the individual to undertake business activities and have essentially the freedom to work without the consequences and restrictions of bankruptcy.

The procedure

The formal documentation includes the proposal offer and the individual's statement of affairs and affidavit which provides the details of the insolvent's assets, debts, and liabilities and provides a background statement with an explanation on how insolvency occurred and the benefits of the proposal and why creditors should support the proposal.

Voting at meetings

A proposal must be approved by requisite majorities in number and value and then sanctioned by the High Court to be valid. This requires 50% in number and 75% in value of creditors voting on the matter to pass a resolution agreeing to the proposal. Following the creditors' meeting, the provisional trustee seeks Court approval for the proposal.

Approval of proposal by the court

At the Court hearing, the Court considers the merits of the proposal and provides an opportunity for opposing creditors to be heard. The grounds for refusal of the proposal are set out in the Insolvency Act 2006. These include non-compliance with the Insolvency Act 2006, the terms of the proposal not being reasonable or not calculated to be for the benefit of the general body of creditors or that it is not expedient that the proposal be approved. Public interest and commercial considerations are also taken into account by the Court. There is no benefit in putting forward a proposal when the insolvent is aware that more than 25% by value of their creditors would oppose the proposal in any case.

The Court generally accepts the views of the majority of creditors. However, this is not a pre-determinant of the proposal. The wider public interest consideration is relevant and unless it is clear that the creditors are better off under the proposal than in bankruptcy, then the proposal can be rejected at the Court approval stage.

General comments

If bankruptcy proceedings have been lodged and are pending, a proposal can be presented to creditors at this late stage and an adjournment sought. It is, however better to be pro-active rather than reactive and to propose a Part 5 proposal to creditors prior to bankruptcy notices being served.

No enforcement or bankruptcy proceedings can be taken during the period from filing the proposal and the Court application for approval of the proposal. On the completion of the proposal the insolvent person is released from any liability whatsoever to the participating creditors whether personally as guarantor or otherwise.

McDonald Vague has assisted many insolvent people over the years with presenting Part 5 proposals under the Insolvency Act 2006 and prior to that, Part XV proposals under the Insolvency Act 1967.

We have provided advice to individuals and have completed many successful proposals. These proposals have been for a range of percentages in the dollar of the debt owing and have been over time periods of up to three years. We have found that creditors generally prefer proposals that offer lump sum payments up front or over short time periods. Often the percentage in the dollar is less relevant than the physical amount paid.

Insolvent persons with debts less than $40,000 can also consider No Asset Procedures as other alternatives to bankruptcy.

If you have a client who you think may benefit from a Part 5 proposal - particularly a client who has a vested interest in remaining in business and not being restricted from a director's position - please contact us to discuss their situation and we would be happy to advise further.

Please also see our more detailed article on this topic headed 'Personal insolvency - 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.

Friday, 16 December 2011 13:00

Personal insolvency - Part 5 proposals

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 fulfills 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:-

An insolvent may make a proposal to creditors for the payment or satisfaction of the insolvent's debts

A proposal may include all or any of the following:

  • an offer to assign all or any of the insolvent's property to a trustee for the benefit of the creditors
  • an offer to pay the insolvent's debts by installments
  • an offer to compromise the insolvent's debts at less than 100 cents in the dollar
  • an offer to pay the insolvent's debts at some time in the future
  • any other offer for an arrangement for the satisfaction of the insolvent's debts

 

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.