What is a personal insolvency agreement (Part X arrangement)?

A personal insolvency agreement (PIA) is an alternative to bankruptcy.

If you are facing financial difficulties or cannot pay your debts, you can put to your creditors a proposal for a PIA.

A PIA is a flexible way for you to come to an arrangement with your creditors to settle your debts without going into bankruptcy. Generally, it should provide your creditors with a better return than if you declared bankruptcy.

What are the advantages of a PIA?

The advantages of a PIA over bankruptcy include:

  • it avoids bankruptcy, which lasts for three years
  • assets don’t need to be sold, as would occur under bankruptcy
  • it avoiding some of the restrictions placed on a bankrupt in relation to travel, operating a business and incurring debts
  • there is no requirement to pay income contributions (which may be required under bankruptcy).

What form can a PIA take?

A PIA can take a number of forms:

  • a lump sum payment to creditors, either from your own money or money from third parties (for example, family or friends)
  • transfer of assets to creditors or the payment of the sale proceeds of assets to creditors
  • a payment arrangement with creditors (which could include the deferral of repayments).

Who can propose a PIA?

In order to propose a PIA, you must be:

  • insolvent
  • in Australia and have an Australian connection (for example, you usually live in Australia or carry on business in Australia).

What is the process involved for entering a PIA?

Step 1: appoint a controlling trustee

You appoint a controlling trustee to take control of your property and put together a proposal for your creditors.

The controlling trustee examines your financial affairs and compiles a report for your creditors that:

  • advises creditors of the amount they can expect from the proposal compared with what they could expect if you became bankrupt
  • makes a recommendation as to whether it is in the creditors’ interests to accept the proposal.

Step 2: hold a creditors’ meeting

A creditors’ meeting must be held within 25 days of the controlling trustee’s appointment (or within 30 days, if they are appointed in December) at a time and location convenient for creditors.

You must attend the meeting, unless excused by the controlling trustee.

At the creditors’ meeting, the creditors consider and vote on the proposal.

The creditors may ask you questions before deciding how to vote.

Acceptance requires a ‘yes’ vote from a majority of creditors who represent at least 75 per cent of the dollar value of the voting creditors’ debts.

Step 3: if your proposal IS accepted by your creditors

If the proposal is accepted by your creditors, you are bound by the terms of the personal insolvency agreement.

However, the personal insolvency agreement does not affect a secured creditor (in relation to dealing with their security).

A trustee (who may be different from the controlling trustee but must be a registered trustee or the Australian Financial Security Authority (AFSA)) is appointed to administer the agreement.

Step 4: if your proposal is NOT accepted by your creditors

If the proposal is rejected by your creditors, they will:

  • vote in favour of your becoming bankrupt, or
  • leave it to you to decide how to resolve your financial difficulties.

If the proposal lapses or is rejected, you cannot, without the court’s permission, appoint another controlling trustee for six months.

What is a controlling trustee?

A controlling trustee must be a:

  • registered trustee
  • the AFSA, or
  • a suitably qualified solicitor.

What is the effect of a PIA?

When you appoint a controlling trustee, you commit an act of bankruptcy. A creditor can use this to apply to the court to make you bankrupt.

Even if your attempt to set up a PIA fails, the appointment of a controlling trustee and the setting up of the PIA will be recorded on the NPII forever.

Your details will also appear on a record held by a credit reporting organisation for up to five years – or longer, in some circumstances.

Once you have executed a PIA, you are automatically disqualified from managing a corporation until the terms of the PIA have been complied with.

When does the PIA come to an end?

Generally, a PIA will end when all the obligations that the PIA has created have been discharged. This will usually be when the trustee has paid the final dividend to creditors.

Are you or your company facing an uncertain financial future? David Clout leads a team of highly regarded experts in insolvency. They are experienced negotiators and strategic thinkers. David is a registered Liquidator and Bankruptcy Trustee, he is qualified to accept a range of insolvency appointments. Call +61 7 3129 3316 to arrange a consultation.