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Case Study: PART X – A Better Outcome Than Bankruptcy

ByPaul Nogueira

The situation

An individual was facing significant personal insolvency issues, with the main creditor being the Australian Taxation Office.

The ATO was owed approximately $262,000, primarily arising from Director Penalty Notice liabilities.

The individual was considering bankruptcy. However, before proceeding, the likely bankruptcy outcome was compared with the alternative of putting a proposal to creditors under Part X of the Bankruptcy Act.

The proposal

A third party was prepared to contribute approximately $100,000 towards a Part X proposal.

The contribution provided a pool of funds that would not otherwise have been available to creditors in bankruptcy.

After allowing for the estimated costs of the Part X process, the proposal was expected to provide creditors with a return of approximately 30 cents in the dollar.

Comparison with bankruptcy

The estimated return under the Part X proposal was better than the anticipated return creditors would receive if the individual became bankrupt.

This was an important part of the assessment.

A Part X proposal is not simply about allowing a debtor to avoid bankruptcy. Creditors need to consider whether the proposal provides them with a better commercial outcome than the alternatives available to them.

In this matter, the third-party contribution materially improved the position for creditors.

Why Part X was worth considering

Part X allows an insolvent individual to put a formal proposal to creditors as an alternative to bankruptcy.

Depending on the circumstances, it may:

  • allow an individual to avoid bankruptcy;
  • provide creditors with a better return than bankruptcy;
  • bring in third-party funds that may not otherwise be available to creditors; and
  • provide a structured and commercial resolution of the individual’s financial position.

However, Part X is still a formal personal insolvency process under the Bankruptcy Act.

A controlling trustee must investigate the debtor’s financial position, review the proposal, consider the likely outcome in bankruptcy and report to creditors. There are costs involved, significant disclosure obligations and the process is recorded on the National Personal Insolvency Index.

The key takeaway

Part X can be a useful alternative to bankruptcy where there is additional value available to creditors, particularly through a third-party contribution.

The important question is not simply whether bankruptcy can be avoided.

It is whether the proposal produces a better outcome for creditors than bankruptcy.

In this matter, a contribution of approximately $100,000 provided the basis for an estimated return of approximately 30 cents in the dollar — materially better than the estimated bankruptcy outcome.

As with most insolvency matters, the earlier the position is reviewed, the more options are usually available.

Considering a Part X Proposal?

A Part X Personal Insolvency Agreement can provide an alternative to bankruptcy where a proposal to creditors may produce a better outcome.

For more information about the process and how I can assist, see my Part X Personal Insolvency Agreements service page.

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