Part X Personal Insolvency Agreements: An Alternative to Bankruptcy
Overview
A personal insolvency agreement may provide an alternative to bankruptcy for an individual who cannot pay their debts but can put forward a meaningful proposal to creditors.
These agreements are commonly referred to as Part X agreements, after the relevant part of the Bankruptcy Act.
A Part X agreement is a formal and legally binding arrangement between a debtor and their creditors. It may involve a lump-sum payment, payments over time, the sale of assets, contributions from another person or a combination of these arrangements.
It can provide more flexibility than bankruptcy, but it is not a private or informal compromise. The debtor’s financial affairs are investigated, creditors receive a report and creditors decide whether the proposal should be accepted.
Who may consider a Part X proposal?
Although Part X has no prescribed debt, asset or income limits, other eligibility requirements apply.
The debtor must be insolvent, have the required connection with Australia, not be an undischarged bankrupt and generally must not have given another effective controlling trustee authority during the previous six months without the Court’s permission.
The proposal must include a draft personal insolvency agreement. Once the authority becomes effective, the debtor cannot simply withdraw it.
This distinguishes it from a Part IX debt agreement, which has eligibility thresholds.
Part X may be considered where an individual has:
- substantial taxation or business debts;
- personal guarantees;
- interests in companies or trusts;
- real property or investment assets;
- claims arising from a failed business;
- complicated dealings with related parties; or
- access to funds from family members or another third party.
Ultimately whether a Part X is a suitable option depends upon an individual’s circumstances.
How does the process start?
The process begins when the debtor appoints a controlling trustee.
The debtor provides the trustee with a statement of affairs setting out their assets, liabilities, income, business interests and recent financial dealings. The debtor must also provide a proposal explaining how they intend to deal with their debts.
At this stage, there is not yet a personal insolvency agreement. There is only a proposal for creditors to consider.
Once the appointment takes effect, the controlling trustee takes control of the debtor’s property. The debtor cannot sell, transfer, mortgage or otherwise deal with property under the trustee’s control without consent.
Unlike bankruptcy, the debtor’s property does not vest in the controlling trustee. However, it becomes subject to the trustee’s control and statutory charges apply over the property.
Signing the controlling trustee authority is also an act of bankruptcy. This does not automatically make the debtor bankrupt, but it can expose the debtor to bankruptcy proceedings if the proposal is not accepted or the process later fails.
The appointment and its outcome are also recorded permanently on the National Personal Insolvency Index.
An effective controlling trustee authority does not create a general moratorium on all creditor action. Proceedings relating to a creditor’s petition are automatically stayed until the earlier of the conclusion or adjournment of the creditors’ meeting. Certain execution and attachment processes are also restricted once the required written notice is given to the sheriff or relevant court officer. The Court may also stay specified legal processes while the debtor’s property remains subject to control.
What does the controlling trustee do?
The controlling trustee does more than prepare and distribute the debtor’s proposal.
The trustee must investigate the debtor’s financial position and provide creditors with enough information to make an informed decision.
Depending on the circumstances, the investigation may include:
- verifying the debtor’s assets and liabilities;
- obtaining information about companies and trusts;
- reviewing property values;
- examining payments and transfers to related parties;
- considering transactions that may be recoverable in bankruptcy;
- reviewing the causes of the debtor’s insolvency;
- checking the existence and value of creditor claims; and
- confirming whether the proposed funding is realistic.
The trustee then reports to creditors and compares the likely outcome under the proposal with the likely outcome if the debtor becomes bankrupt.
This comparison should consider more than the estimated dividend. Timing, costs, litigation risks and the certainty of the proposed funding may also be relevant.
AFSA has recently emphasised that controlling trustees must properly verify information, investigate potential recoveries, independently assess related-party claims and ensure that proposals are realistic and in creditors’ interests.
The controlling trustee must remain independent. The trustee is not the debtor’s advocate and cannot simply recommend the proposal because it is the debtor’s preferred outcome.
What might a Part X proposal offer?
A proposal can be structured in different ways.
It may involve:
- an immediate lump-sum payment;
- instalments over an agreed period;
- the sale or refinancing of property;
- contributions from future income;
- the transfer of particular assets;
- money contributed by a spouse, relative or business associate; or
- a combination of these arrangements.
A proposal may allow the debtor to retain assets, including a home or business interest, if creditors agree to those terms.
For example, creditors may accept a third-party contribution that allows a debtor to retain an asset where the contribution provides a better return than the amount creditors are likely to receive from selling the debtor’s interest in bankruptcy.
The proposal must be achievable. Creditors may be reluctant to accept an offer that depends on an uncertain refinance, an undocumented third-party contribution or financial projections that are not properly supported.
Trustee fees and the other costs of administering the proposal also need to be allowed for when estimating the return to creditors.
How do creditors vote?
The controlling trustee calls a meeting of creditors, within 30 business days after the controlling trustee consents to act.
Before the meeting, creditors receive the debtor’s proposal, statement of affairs and the controlling trustee’s report.
Creditors can ask questions, examine the information provided and vote on the proposal.
The debtor is required to attend the meeting and answer creditors’ questions.
For the proposal to be accepted, it must receive a special resolution. This generally requires:
- a majority in number of the creditors voting; and
- at least 75% of the dollar value of the debts voted.
Both parts of the voting test must be satisfied.
The controlling trustee also decides whether creditor claims should be admitted for voting purposes. Particular care may be required where the claims are made by family members, related companies, trusts or other associated entities.
What happens if creditors accept the proposal?
If creditors accept the proposal, the debtor executes a personal insolvency agreement and a trustee administers its terms.
The personal insolvency agreement must generally be executed as a deed within 21 days after creditors pass the special resolution accepting the proposal.
The agreement determines:
- what property or money must be provided;
- when payments must be made;
- what assets the debtor may retain;
- how creditor claims will be assessed and resolved;
- how funds will be distributed; and
- when the agreement will be completed.
A properly executed personal insolvency agreement binds all creditors in relation to provable debts. While the agreement remains valid, creditors generally cannot commence or continue recovery action in respect of those debts. Secured creditors retain their rights against their security, and maintenance liabilities are treated differently.
The debtor must comply with all terms of the agreement. The trustee may collect payments, sell assets and distribute funds to creditors, depending on what the agreement provides.
The length of the agreement is not fixed by legislation. It depends on the terms accepted by creditors.
What debts are covered?
A Part X personal insolvency agreement will generally deal with debts that are provable under the agreement. Broadly, these include present, future, certain and contingent liabilities arising from obligations incurred before the agreement is executed.
The agreement should expressly provide for the extent to which the debtor will be released from those debts. A personal insolvency agreement does not automatically release the debtor from every provable debt merely because the agreement has been executed.
Not every liability is treated in the same way.
Court-imposed fines and penalties for offences, and specified student loan debts, are not provable and fall outside the statutory provable-debt regime.
Other debts may be provable but not released. These include debts incurred by fraud or fraudulent breach of trust. Liabilities under a maintenance agreement or maintenance order may also be provable, but the agreement does not generally prevent their enforcement or release the debtor from them.
The rights of secured creditors to enforce their security are generally preserved. The agreement also does not release guarantors, co-debtors or other persons who are jointly liable with the debtor.
The treatment of each liability should therefore be carefully considered and expressly addressed when the proposal and personal insolvency agreement are prepared.
What about secured and joint debts?
A secured creditor generally retains its rights against the secured property.
For example, a mortgage lender may still enforce its mortgage if loan repayments are not maintained. Entering into a Part X agreement does not, by itself, allow the debtor to retain secured property without continuing to deal with the secured debt.
A Part X agreement also does not automatically release another person who is jointly liable for a debt.
If two people jointly owe a debt and only one enters into an agreement, the creditor may continue pursuing the other person.
Guarantors may also remain liable unless the relevant creditor specifically agrees to release them.
Can taxation debts be included?
Taxation debts can generally be included in a Part X proposal.
The Australian Taxation Office may therefore participate as a creditor and vote on the proposal.
However, the ATO may retain rights that affect the debtor after the agreement is accepted.
The treatment of future tax refunds and credits can be complicated. Whether the ATO may offset a refund or credit will depend on matters including the nature and timing of the debt and credit and the terms and status of the agreement. This should be considered when the proposal is prepared.
Where the ATO is a substantial creditor, the proposal will usually need to provide a clear explanation of how the debt arose, the debtor’s compliance history and why the proposed outcome is better than bankruptcy.
What if creditors reject the proposal?
Creditors do not have to accept a Part X proposal merely because it provides some return.
If creditors do not accept the proposal, the controlling trustee’s control does not necessarily end automatically. Creditors may, by special resolution, resolve that the debtor’s property cease to be subject to control or require the debtor to present a debtor’s petition within seven days. If no relevant resolution is passed, control continues until another terminating event specified in the Bankruptcy Act occurs, including the expiration of four months after the authority became effective.
These consequences mean that a Part X proposal should not be used simply to test whether creditors will accept a discounted payment.
The debtor should understand the likely bankruptcy outcome and the risks of rejection before the process begins.
What are the other consequences?
A Part X agreement avoids bankruptcy, but it remains a formal personal insolvency administration.
Important consequences include:
- the debtor’s details appearing permanently on the NPII;
- information about the controlling trustee authority and any personal insolvency agreement appearing on the debtor’s credit report for the applicable statutory retention periods;
- restrictions on dealing with property;
- an obligation to provide information and documents to the trustee;
- possible effects on professional licences, employment and contractual arrangements; and
- disqualification from managing corporations until the terms of the agreement have been fully complied with, unless the Court grants leave.
A debtor may be able to continue operating a business where the terms of the arrangement permit it, but this does not remove the restriction on managing a corporation.
Anyone involved in existing legal proceedings, including family law property proceedings, should also obtain advice about how the Part X process may affect those proceedings.
What happens if the debtor cannot comply?
The debtor should speak to the trustee as soon as it becomes apparent that a payment or other obligation cannot be met.
It may be possible to propose a variation to creditors. Creditors are not required to accept the change.
If the default is not addressed, the agreement may be terminated. Creditors may then regain their rights to recover the unpaid balance of their debts and may seek to make the debtor bankrupt.
A proposal should therefore be based on funding and payment obligations that the debtor can realistically meet.
Regulatory oversight
Personal insolvency agreements operate within a regulated system. AFSA, through the Inspector-General in Bankruptcy, supervises registered trustees and may examine whether a controlling trustee has properly investigated the debtor’s affairs, reported accurately to creditors and acted independently.
Acceptance by creditors does not necessarily end that scrutiny. Depending on the ground relied upon, the Inspector-General, the trustee or a creditor may apply to the Court to have the personal insolvency agreement set aside. The debtor may also apply on the narrower grounds that the agreement was not entered into, or does not comply, with the requirements of Part X.
The Court may set an agreement aside where, for example:
- its terms are unreasonable or are not calculated to benefit creditors generally;
- the requirements of Part X were not properly followed;
- false or misleading information was provided; or
- material information was omitted or incorrectly disclosed.
The Court ultimately decides whether the agreement should be set aside. This reinforces the importance of full disclosure, proper investigation and a proposal that provides a genuine benefit to creditors.
Is Part X always better than bankruptcy?
Not necessarily.
A Part X agreement may allow a debtor to avoid bankruptcy, retain particular assets or resolve their debts more quickly. However, those benefits do not determine whether creditors should accept the proposal.
The central question is whether the proposal provides a fair and commercially better outcome for creditors than bankruptcy.
That assessment requires:
- full disclosure by the debtor;
- proper investigation by the controlling trustee;
- reliable asset values;
- a realistic source of funding;
- careful consideration of potential bankruptcy recoveries; and
- an independent comparison of the available outcomes.
A proposal that is designed mainly to protect the debtor’s wealth while providing little benefit to creditors is unlikely to withstand proper scrutiny.
Obtaining advice early
Part X proposals are usually more effective when considered before enforcement action has exhausted the debtor’s options.
Time may be needed to investigate assets, value business or trust interests, secure third-party funding and prepare a proposal that creditors can properly assess.
A well-prepared Part X proposal can provide a structured alternative to bankruptcy. However, it must be transparent, achievable and supported by a genuine benefit to creditors.
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