Applied Business Law

29 Sep 2009

Facing Bankruptcy? How about this for a Proposal!

Our last two FYIs on the subject of insolvency (see Applied Business Law FYI, February 2009 and Applied Business Law FYI, May 2009) focused on:

1. options available for dealing with insolvent companies; and
2. purchasing opportunities when companies are insolvent.

In this FYI we focus on an aspect of personal insolvency which has seen an increase.

There has been exponential growth in the numbers of companies facing insolvency. For the year ending June 2009 the Insolvency and Trustee Service alone has administered 373 liquidations. 

This is just over twice the number administered for the year ending June 2008. These statistics do not include liquidations administered by private practitioners for which there are no reliable statistics. However, it is safe to assume that liquidations administered by private practitioners have also grown exponentially.

Over time, the effects of the surge in corporate insolvencies such as liquidations and receiverships will filter down to individuals who have guaranteed the obligations of insolvent companies. Many of these individuals will face bankruptcy. Part 5 of the Insolvency Act 2006 provides alternatives for individuals facing bankruptcy.

This FYI will look at one of those alternatives, namely "Proposals". Proposals are a creditors' compromise, much like a company creditor compromise, but for individuals. A Proposal is an option for individuals to consider which may help to stave off bankruptcy.

Why look to a Proposal? There are a number of reasons why an individual might look to enter into a Proposal with their creditors.

1. They may have existing business interests or wish to launch back into business once they have tidied up issues with an insolvent company.
2. When bankrupt you are prevented from being a director of a company. There are also other restrictions such as loss of control of financial affairs, to some degree, and restrictions on international travel.
3. The avalanche of obligations that besets the guarantor of an insolvent company can leave them with no other alternative.
4. For many people there is a stigma attached to bankruptcy that they would rather avoid, if at all possible.

Before considering putting forward a Proposal there are 3 steps that should be taken:

1. Determine the source of funds to pay creditors and meet the costs of preparing and administering the Proposal. You need to determine where funding will come from and the amount creditors might expect to receive. Funding may come from various sources including existing assets, future earning capacity or benevolent friends and relatives.
2. Conduct a straw poll of all known creditors to gauge the likelihood of success in having creditors approve the Proposal. There is no point going down the path of putting together a Proposal if you do not have the requisite support of creditors.
3. Source out professionals:
   1. a person (usually an insolvency practitioner) prepared to act as provisional trustee prior to approval of the Proposal, and trustee once the Proposal is approved; and
   2. a lawyer with experience in this area to advise you and guide you through the process.

Provisional Trustee

The provisional trustee administers the initial stages of the Proposal - preparation of a Proposal, a statement of affairs and holding a creditors' meeting. The fees of the provisional trustee and their associated legal costs will need to be agreed and provision for payment recorded in any Proposal.

Proposal

The next step is to put together a Proposal. The Proposal as the name suggests outlines:

1. how the individual proposes to deal with each class of his or her creditors. The Proposal will record a commitment to pay off a percentage of secured and unsecured creditors' debts (preferential creditors are required to be paid in full under a Proposal);
2. whether payment will be in one lump sum or over a period of time; and
3. security offered (if any) to secure payment under the Proposal.

The Insolvency Act 2006 also prescribes a number of other matters that must be addressed in the Proposal such as details of creditor claims and rights to terminate the Proposal.

The key element of the Proposal, as far as the individual is concerned, is that the Proposal is a full and final settlement of all personal debts and provides that the individual can undertake business activities, receive income or capital, pay out sums of money to other people and effectively have the freedom to move on free of the stigma and or consequences of bankruptcy.

Statement of Affairs and Affidavit

The Proposal is also accompanied by the individual's statement of affairs and affidavit. The statement of affairs:

1. details the assets, debts and liabilities of the individual;
2. provides an explanation of how the individual became insolvent; and
3. is accompanied by a short statement about the benefits of the Proposal to creditors.

The affidavit will confirm the truth of the statement of affairs and that the individual has not gifted away assets and does not have any beneficial interests under any trust.

Creditors' Meeting

The Proposal, statement of affairs and affidavit are filed in the High Court and served on the creditors. The provisional trustee sets the date for the creditors meeting and calls a meeting by giving notice to each of the creditors and providing them with a proof of debt form to complete. At the creditors' meeting the creditors are able to question the individual. They are also able to seek to have the Proposal amended, usually seeking payment of a larger sum of money to be shared among the creditors or replacement of the provisional trustee. A Proposal is passed by the creditors at a creditors' meeting if 50% in number and 75% in value pass a resolution agreeing to the Proposal.

Court Approval

The final step is to seek Court approval of the Proposal. Creditors who oppose the scheme are able to appear at this hearing and seek to have the Proposal rejected or have the individual placed into bankruptcy. Court approval provides opportunity for the Court to examine the Proposal, to ensure that all the boxes have been ticked and to give an opportunity for creditors to be heard. Generally the view is that the Court should accept the view of creditors or the majority of them and grant approval unless it is apparent that one of the grounds for refusing approval exists. Grounds for refusing include:

1. provisions in the Insolvency Act 2006 in relation to Proposals not being complied with; or
2. the terms of the Proposal not being reasonable or not calculated to benefit the general body of creditors; or
3. any reason in the Court's view that it is not expedient that the proposal be approved.

The mere fact that a majority of creditors have approved the Proposal is not determinative of approval. Normally if creditors would fare better under the Proposal than under bankruptcy, approval should normally be given unless there are other circumstances which speak against approval. The focus is certainly on the interest of the creditors however factors that may also affect this are special public interest or other commercial considerations.

We work closely with insolvency practitioners experienced with administering Proposals and we are able to provide advice to individuals and insolvency practitioners on the legal and practical issues involved in undertaking a Proposal.

Authors

Peter Stubbs

Partner - Corporate & Commercial

DDI: +64 9 977 5010

Mobile: +64 21 955 230

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Gwendoline Keel

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5201

Mobile: +64 21 242 6639

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Craig Nelson

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5185

Mobile: +64 21 918 309

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