Round 2: Are you ok, financially?

By Casey Au
13 October 2021

Just when we thought that we had seen the end of the lockdowns from the first wave of the COVID-19 pandemic, the second wave arrived, making longer and harder lockdowns necessary and business more difficult.

Businesses and individuals who struggled through the first round of lockdowns, had to face a second round, that meant working from home, reduced hours, not working at all and the limit of trading to none at all. This time, with less government support.

It is important that people and businesses seek help quickly when faced with financial distress and inability to repay unmanageable debt. Delaying can make things worse and the problems bigger. Whether the circumstances arose from adverse conditions such as a second wave of a pandemic, excessive borrowing, unemployment, illness, business failures, personal guarantees given in relation to a business, or overreliance on credit, bankruptcy is an option available to assist you in resolving bad financial affairs and open the way for a fresh start. Solutions exist to fix financial ill health and should be used. PKF can help.

Bankruptcy can be a relief

Bankruptcy is a legal process where people can obtain a financial rehabilitation when faced with unmanageable debts. It can be done voluntarily to obtain relief when a person is unable to pay their debts. Despite the stigma associated with declaring bankruptcy, it can be a welcome opportunity to provide a fresh start by releasing a debtor from their old debts and to begin the first step towards financial rehabilitation.

Individuals can consider voluntary bankruptcy as an option and obtain relief from debts immediately. Prolonging a decision on what to do with unmanageable debts may lead to unwanted and unnecessary stress such as, increased emotional stress and financial stress by way of accruing interest and creditors pressing for payment. Financial ill health can lead to personal ill health if not addressed quickly. When bankruptcy is declared, most debts as at the date of bankruptcy are stayed. Most creditors are not allowed to take action to recover their debts, instead they lodge claims with the Trustee of your Bankrupt Estate. The stress of struggling with the unmanageable debt is removed to a trustee.

Composition arrangements to resolve a bankruptcy

A way to resolve a bankruptcy early is to offer an arrangement made pursuant to section 73 of the Bankruptcy Act 1966 (Cth) (“Section 73 composition”) to creditors. This allows for the bankruptcy to be annulled prior to the completion of the minimum three year statutory period of bankruptcy. A Section 73 composition may offer a favourable outcome to creditors as it may allow them to receive a more certain return in a shorter period of time.

A Section 73 composition is formally made when a written proposal is signed and submitted to the Trustee. At a minimum, the proposal must detail what funds or assets are to be contributed, the source of the funds, the timing of payment and whether security is necessary as a guarantee for the payment of the contribution. In most instances, the funds or contributions provided by the bankrupt’s family or friends and these funds may not otherwise be available in a bankruptcy.

Upon receipt of the Section 73 composition proposal, the Trustee reports to creditors on the proposal and his recommendation to creditors. The Trustee will also convene a meeting of creditors so that the Section 73 composition proposal can be considered at that meeting.

The bankruptcy will be annulled if creditors vote to accept the Section 73 composition, which is passed by way of special resolution at the meeting. The majority of creditors in number and at least 75% in value of creditors present must accept the special resolution in order for the resolution to be passed. The Section 73 composition is legally binding on all creditors who have provable debts in the bankrupt estate.

Benefits of accepting a proposal

Benefits of accepting a section 73 proposal compared to staying in bankruptcy include:

  • Creditors are able to obtain a greater return compared to continued bankruptcy.
  • Certainty for the rate and timing of a dividend.
  • Bankruptcy is annulled (undoing of the bankruptcy) rather than maintaining a bankruptcy status for a minimum statutory three year period.
  • Restrictions placed upon bankrupts no longer apply, including being able to incur credit without disclosing a bankrupt status.

Other options besides Bankruptcy

  • Temporary Debt Protection – Completing a declaration of intentions provides you with a 21-day protection period in which unsecured creditors cannot take action against you while you seek assistance and decide how to proceed.
  • Debt agreements – Formal process where a binding agreement is reached between your creditors to accept an amount you can afford.
  • Personal insolvency agreement – Legally binding agreements between you and your creditors to pay your debts partially or in full by an agreed amount in part or installments.

We are here to help

PKF’s Business Recovery and Insolvency Team has licenced experienced and caring trustees to help people and businesses who are experiencing financial distress. We can provide expert help to assess the options available and help rehabilitate a financial injury so that you make a fresh start.