Section 73 Proposals (Under Bankruptcy Act)

What is a Section 73 proposal?

A proposal pursuant to Section 73 of the Bankruptcy Act 1966 is a formal agreement between a bankrupt, creditors and the registered Trustee that monitors the agreement. If creditors accept the Section 73 proposal, the bankruptcy is annulled and it is as though the bankruptcy never occurred.

Under a Section 73 proposal, the bankrupt is released from the restrictions of remaining in bankruptcy. They are released from their debts and their property revests in them (unless it is dealt with in the Section 73 proposal). In return, creditors would expect to be offered a higher return than they would have received in the bankruptcy.

Types of Section 73 Proposals

A Section 73 proposal can be differentiated into two distinct categories: a composition and a scheme of arrangement.

It is more common for a bankrupt to propose a composition. A composition is an agreement to pay funds into the administration to be available to pay creditors and the costs of the administration. It is possible to pay funds over a period of time; however many Trustees will recommend that payment be made upon acceptance to provide greater certainty for creditors.

A scheme of arrangement can involve almost any other kind of consideration, including payment of funds from the bankrupt or third parties and the sale or transfer of property.

Beginning the Process of a Section 73 proposal

The first step is for the bankrupt to approach their Trustee and advise of their intention to put forward a proposal to deal with their debts. The Trustee can evaluate the proposal and provide feedback. The Trustee needs to be in a position to assess whether the proposal would be more beneficial than if the bankruptcy were to continue, so further investigations may be required.

The formal process of a Section 73 proposal begins when a bankrupt provides the Trustee with a written proposal. A Section 73 proposal cannot be submitted jointly by 2 or more bankrupts.

The Report to Creditors
Once the necessary investigations have been satisfied, the Trustee will prepare and issue a report to creditors setting out the details of the proposal and call a meeting for creditors to convene and consider the proposal, and whether the proposal is to be accepted.

The Trustee can ask for a surety to cover the costs of preparing the report to creditors and calling and holding the meeting. If there is no regard to these costs, or the outstanding costs and remuneration of the Trustee can refuse to issue the report or call a meeting.

The Trustee may also refuse to issue a report if the proposal is not bona fide.

Accepting the Proposal
At the meeting, the Trustee will invite creditors to move a motion that the bankrupt’s proposal be accepted or rejected.

For the bankrupt’s proposal to be accepted, a motion must be supported by:

  • Creditors who hold 75% of the dollar value of participating debts
  • A majority of creditors

If either requirement is not satisfied, the motion will be defeated and the proposal will not be accepted. If this is the case then the bankruptcy will continue as before.

Effect of Acceptance
If accepted, the bankruptcy is annulled from the day of the meeting of creditors. Unsecured creditors are bound by the agreement, regardless of whether they are in favour of the proposal. Unsecured creditors receive a dividend from the funds or property made available under the proposal.

Secured creditors maintain their rights to recover and sell security owned by the bankrupt.

Administering the Section 73 proposal
A registered Trustee must administer the agreement – usually it is the case that the former bankruptcy Trustee will collect the funds and / or property and make a distribution to unsecured creditors.
When does a Section 73 Agreement end?

Usually the Section 73 proposal comes to an end when all parties have completed their obligations and responsibilities under the proposal.

However, a Section 73 proposal can also be terminated by the following ways:

  • If the terms of the section proposal are not complied with, the Trustee and / or creditors terminate the agreement
  • By an order of the court, usually on the basis that the composition cannot be proceeded with without injustice or undue delay to the creditors, the approval of creditors was obtained by a misrepresentation by the former bankrupt, or if it is desirable that the composition be set aside on the basis of non-compliance

The Section 73 proposal will usually contain terms which set out what steps the Trustee can take to enforce compliance in the event of a default.

Termination of a Section 73 proposal due to non-performance is an act of bankruptcy, and could be relied upon by creditors or the Trustee to bankrupt the person again.

For further information regarding Section 73 Proposals, visit AFSA at www.afsa.gov.au

 

 

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Handbooks

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