A Personal Insolvency Agreement (“PIA“) is an alternative to bankruptcy.
In order to avoid bankruptcy, a person who is unable to pay their debts or who is suffering financial hardship can put forward a proposal to their creditors for a PIA.
Appointment of Controlling Trustee in Order to Put Forward a Proposal for a Personal Insolvency Agreement
In order to put forward a proposal for a PIA a person (debtor) must appoint a controlling trustee who must be a registered trustee, a solicitor or the official trustee from AFSA. The controlling trustee will:
- Take control of any assets which a debtor owns;
- Review the debtor’s circumstances and investigate their affairs; and
- Determine whether there would be any return to creditors if the debtor was made bankrupt instead.
The controlling trustee will issue a report to creditors within approximately one month, which will include (among other matters):
- Brief details of the debtor’s financial affairs;
- A summary of the debtor’s assets (if any);
- Details of the debtor’s creditors;
- A summary of the estimated returns to creditors should the debtor go bankrupt or if the proposal for a PIA is accepted; and
- A recommendation as to whether or not creditors should accept the proposal for a PIA.
The controlling trustee will then convene a meeting of creditors at which creditors will vote on the PIA proposal. To be accepted at the meeting of creditors, the PIA proposal must be approved by a special resolution of creditors, being approval by a majority in number and more than 75% of the value of creditors voting at the meeting. If the proposal is accepted, then it is binding on all creditors and (subject to compliance) the debtor will avoid bankruptcy. If the proposal for a PIA is not accepted then the debtor does not automatically become bankrupt, however, it is common that they will in the future.
After a PIA proposal is accepted at a meeting of creditors:
- A PIA trustee must be appointed (this is commonly the same person(s) as the controlling trustee); and
- The PIA trustee and debtor have 21 days to sign a PIA.
Once the PIA is signed, the controlling trustee period ends, the PIA comes into force and the debtor then must comply with the terms of the PIA.
How Does a Personal Insolvency Agreement End
The PIA comes to an end when all amounts required to be paid by a debtor are paid, the PIA trustee has distributed all funds held to creditors and lodgements are made with AFSA to finalise the arrangement. The time this will take is dependant upon the terms of the PIA, for example if a PIA involves a lump sum that will be paid quickly then the PIA may be finalised in two to three months, however, if the PIA requires payments to be made over time then this will obviously take longer.
A PIA can also be terminated for non-compliance or other reasons by:
- The trustee administering the PIA through either convening a meeting of creditors to terminate the proposal or via a Court application.
- A creditor bound by the agreement via a Court application generally where the creditor considers the terms of the PIA are unfair, although a creditor can also ask for the Trustee to terminate the PIA.
- The debtor themselves via an application to Court, although a debtor can also arrange for the trustee to terminate the PIA.
- The administrator of the debtor’s estate (if the debtor has died).
Possible Form of a Proposal for a Personal Insolvency Agreement
A proposal for a PIA may take many forms, however, it may commonly involve:
- The sale of certain assets which a debtor owns; and/or
- Payment of a lump sum amount by a relative or associate of the debtor; and/or
- Payment of amounts over time by instalments by the debtor; and/or
- Certain creditors associated with the debtor agreeing not to claim for a dividend if the proposal is accepted.
Possible Benefits of Entering into a Personal Insolvency Agreement
The benefits of entering into a PIA, may include:
- If accepted and complied with, a PIA results in a person avoiding bankruptcy which would last for at least three years.
- A debtor is not required to make income contributions under a PIA whereas in bankruptcy if a debtor earns over a certain amount each year they may be required to pay contributions to their bankruptcy Trustee.
- A debtor who enters into and complies with a PIA is released from their provable debts which they owe to creditors.
- Certain assets may not be sold under a PIA which would otherwise be sold in bankruptcy.
- Certain recovery claims which may be available to a bankruptcy Trustee would not be pursued under a PIA.
- Some of the restrictions placed upon a bankrupt not applying, including restrictions relating to travel, trading businesses and incurring debts.
Possible Issues to Consider for Personal Insolvency Agreements
There can be some issues associated with appointing a controlling trustee and/or entering into a PIA including:
- The appointments are listed on the National Personal Insolvency Index (and are recorded there forever) and they appear on a person’s credit rating.
- There are costs associated with the appointments, and the costs or a portion of the costs of a controlling trustee most commonly have to be paid up front.
- Whilst a debtor is subject to a PIA they cannot be a director of a company (although they can be a director during the controlling trustee period).
- The appointment of a controlling trustee operates to automatically exclude people from holding a building licence in Queensland for a period of three years.
- In most PIA proposals additional funds will have to be paid for the benefit of creditors over and above assets/funds which would be realisable in a bankruptcy.
- There is obviously no certainty that, if a controlling trustee is appointed, creditors will accept any proposal for a PIA.
What Other Options Are Available
The primary other option available to a person who cannot pay their debts is to enter into bankruptcy. The main impacts of bankruptcy include:
- Bankruptcy generally goes for three years.
- A debtor is released from their provable debts.
- Any assets which a debtor owns which are divisible property will be sold including their house, car over a certain value, and shares. A debtor’s cash at bank over a certain value may also be recovered.
- A debtor is required to pay contributions from their income to their bankruptcy Trustee each year if their income exceeds a certain amount.
For further information regarding bankruptcy and the effects see here.
Advice Regarding Personal Insolvency Agreements
If you are seeking advice regarding the possibility of appointing a controlling trustee and putting forward a proposal for a PIA, please contact our Brisbane or Gold Coast office and our experienced staff will be able to assist you.
If you are considering Bankruptcy, you may use our Income Contribution Calculator to estimate the income contributions you are liable for.
