Section 73 Proposals: Early release from bankruptcy via annulment
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Financial distress caused by Covid-19 has severally affected businesses and individuals alike. As the temporary relaxations in the insolvency regime near their end in September 2020 and the government prepares to phase out the stimulus measures, a wave of bankruptcy seems probable to follow.
Typically, a bankruptcy lasts for three years and one day from the day one files for bankruptcy. One way of ending a bankruptcy early is through a proposal to annul the bankruptcy pursuant to Section 73 of the Bankruptcy Act 1966. An annulment is as though the bankruptcy never occurred.
A Section 73 proposal typically involves the bankrupt offering creditors a superior dividend than what they would receive had the bankruptcy continued, in exchange for bringing their bankruptcy to an early conclusion. Given there is no automatic release of debts under section 73 agreements (unlike discharge from bankruptcy), the proposal needs to include provisions specifying the release of debts after annulment and the complete performance of the agreement.
Section 73 proposals can be made at any point of the bankruptcy and can take the form of either:
- A Composition, which is an agreement to pay a defined sum to the trustee over a set period for distribution; or
- A scheme of arrangement, which is a flexible instrument that can contemplate a vast range of lawful provisions to compromise the bankrupt’s liabilities (e.g. payment of monies, sale of certain assets, and payments from third parties).
To make a Section 73 proposal, a bankrupt first needs to set out the terms in a written proposal lodged with their bankruptcy trustee, who will appraise its merits compared to the likely dividend from the bankruptcy’s continuation, issue a recommendation to creditors regarding whether it is in their interests to accept the proposal, and convene a meeting of creditors to vote on the matter. Acceptance requires a special resolution to be carried with 75% of creditors in value and a majority in number voting in favour of the proposal.
Once accepted, a Section 73 agreement would become binding on all creditors and the bankruptcy would be annulled from the acceptance date. This means that:
- the many restrictions placed upon bankrupts would no longer be applicable. For instance, the ex-bankrupt may travel overseas without needing the trustee’s permission, and obtain credit without the disclosure of bankrupt status; and
- the ex-bankrupt’s credit rating may be restored to pre-bankruptcy level, though this is at the discretion of credit reporting agencies.
While a Section 73 agreement may end a bankruptcy sooner, the following aspects need to be noted:
- Breach of a section 73 agreement may result in its termination and the bankrupt being re-bankrupted;
- The insolvency appointment and the debtor’s personal information remains permanently recorded on the National Personal Insolvency Index, the publicly available national register of all personal insolvency proceedings. The status displayed for a section 73 agreement is “annulled”, whereas a bankruptcy will show “bankrupt” or “discharged bankrupt”.
- Like bankruptcies, Section 73 agreements also attract the government realisation charge, which currently stands at seven percent of the gross monies received into the administration less payments to secured creditors and trade-on costs. The charge has priority over any dividend to creditors.
The team at Collins Wentworth are experienced in personal and business financial matters. If you wish to know more about how we can assist you, contact us today.
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