Personal Insolvency Agreements (PIAs) – Meeting Your Creditors Halfway
In most cases, people prioritise the repayment of their debts. Even though those debts may be long term and involve substantial amounts or high interest rates, the sound conduct of personal or corporate finances entails the timeous servicing or settlement of loans. However, for several diverse reasons, borrowers sometimes find themselves in a situation in which it is simply impossible for them to pay what they owe, and their debts reach unmanageable proportions. At such a time, they may decide to institute a Personal Insolvency Agreement (PIA) with their creditors.
Insolvency is not something that has positive connotations. It implies that the insolvent person or business is unable to meet its credit obligations or continue with ordinary operations. Despite its disastrous nature, though, it is an established status at law and there are regulations and procedures associated with it. The option of a Personal Insolvency Agreement is one of them. The others are the conclusion of a debt agreement, filing for bankruptcy, or a measure providing interim relief. This article discusses the Personal Insolvency Agreement exclusively, since the other options have their own respective legal requirements and consequences.
Requirements for a Personal Insolvency Agreement
Insolvency is technically defined as the state that is reached when someone’s assets are exceeded by their liabilities (in lay language, liabilities are debts). In other words, they cannot use the means at their disposal to pay what they owe. They may either have no income anymore and thus be unable to pay anything towards their debts, or they may have suffered a reduction in income and can only pay less than what was agreed on. People who are operating in this state are allowed to propose an insolvency agreement to their creditors.
In order to qualify for this opportunity, insolvency is the basic requirement. There are two other legal provisos. Firstly, the insolvent person must either reside in the territory of Australia or have some concrete association with it, such as a fixed residential address there that is where they usually stay or an established business interest. Secondly, they must not have proposed such an agreement at any time in the last six months. In contrast to the other legal avenues like bankruptcy or interim relief, there are no restrictions on the magnitude of the debt involved or the person’s assets and income.
The Personal Insolvency Agreement process is administered by the Australian Financial Security Authority.
One important issue that people considering this route need to take into account is that, once the agreement is in effect, they will not be able to administer their estate autonomously. In order to institute the agreement, a controlling trustee has to be appointed by the insolvent party. This is the first step in the process, and it is officially recognised as an act of bankruptcy, so if anyone wants to request a bankruptcy order against the debtor at a later time, they will be able to use this act to do so.
The controlling trustee has to have a certain status in the legal system. They are only allowed to be one of the following:
- 1. a registered solicitor
- 2. a registered trustee (usually an accountant)
- 3. a representative of the Official Trustee in Bankruptcy (OT – this is a statutory body that handles matters such bankruptcy and insolvency)
It is the trustee who communicates with the creditors, on behalf of the insolvent person. In conjunction with the latter, the trustee composes a proposal which outlines a payment plan and also advises the creditors as to the contrasting outcomes of the insolvency or bankruptcy of the debtor. The trustee is thus a very neutral figure in the process and is not supposed to be partial to the debtor’s interests. Of course, in order to put together a report of this nature they must have comprehensive access to the debtor’s financial information, and the creditors are also under no obligation to keep any of that information private on their side either.
What this step in the process also implies is that those who wish to enter into an insolvency agreement must do so on the basis of the utmost good faith. Trying to hide assets or concoct business records or other information is not advisable. This is especially so given that the OT is mandated by two pieces of legislation (the Customs Act, 1901, and the Proceeds of Crime Act, 2002) to ensure that assets affected by court orders are administered as they should be. Insolvency is not an easy time for anyone, so honesty, transparency and reliable information are essential is devising the optimum agreement.
Creditors have up to 25 working days after the appointment of the controlling trustee to convene a meeting at which they will discuss the proposal. Ordinarily, the debtor is obliged to be there too, unless the trustee gives them permission to abstain from attending. The meeting is conducted in an open atmosphere and creditors are entitled to ask the debtor about their current financial status. The creditors then vote on their response to the proposal.
The proposal may receive two possible responses.
Rejection. If this happens, the creditors may either instruct the debtor to file for bankruptcy, or they may allow the latter the opportunity to devise their own financial strategy. Rejection is accompanied by the restriction mentioned earlier, namely that the rejected debtor cannot submit a successive proposal within six months.
Acceptance. If the agreement is approved by the creditors, they are legally bound by it. Those of them who have security attached to their credit do not lose that security in any way. The agreement is then administered by a trustee, either the same one or another, but they are required to be a registered trustee or the OT. The creditors have the right to vote on the replacement of the trustee if they are not satisfied with the existing one at any stage of the process, while the debtor may request a new one once the agreement has been accepted.
Implications of a Personal Insolvency Agreement
It is strange to say that a situation of insolvency might have potentially positive outcomes, but there are reasons why some people may prefer to enter in this type of agreement than resort to bankruptcy.
Bankruptcy is, in fact, the main one in itself. In bankruptcy, the assets of the debtor are apportioned to the creditors. The distribution of the debtor’s assets may not even be voluntary on their part. It is sometimes the creditors who request the order of bankruptcy against someone who has not been paying them (a sequestration order) so the insolvency agreement provides the debtor with the chance to pre-empt that threat. If the PIA fails, however, creditors still have that option available to them, and it is easier to succeed with.
The debtor can therefore retain important assets and continue to operate their business, if they have one, as long as they are meeting the terms of the Personal Insolvency Agreement. The agreement process thereby provides them with more time to discharge financial liabilities, as opposed to the immediate disassembly of their financial estate through bankruptcy proceedings.
Insolvency is also easier on the debtor in that it allows for only partial repayment of the debt. Creditors may agree to the payment of only a proportion of what is owed, such as 50c in the dollar. This arrangement is more likely to be accepted if the assets of the debtor are nowhere near substantial enough to cover the outstanding amounts and there is an expressed interest on their part in making the repayment out of probable future income. The agreement can contain any terms that the two sides accept mutually. For the duration of the agreement, creditors are unable to institute collection or recovery measures against the debtor, since there is a commitment to an approved repayment schedule.
But, of course, insolvency is not a positive development per se, and there are also decidedly negative consequences for the embattled debtor.
To start with, any debt management solution is a public process. This is entirely necessary because some debtors may try to conceal information or physically escape participation. This is hazardous to other players in the same industry, who may inadvertently deal with a penniless fugitive who has no intention or ability whatsoever to pay them anything. However, some people may not enjoy the exposure in the community of their financial catastrophe or business failure, something which is, admittedly, almost impossible to evade.
Another issue on the same theme is that the debtor is required to meet in person with the creditors (unless he/she is excused from that eventuality by the trustee). This might not be an interaction which they anticipate with enthusiasm. The financial loss or failure of a business enterprise is not tolerated by society and may be accompanied by recriminations, attacks on the debtor’s character, or the annihilation of any future prospects in the industry.
The administrative side of the process is another drawback. It is the opposite of cheap. Professional people like accountants and lawyers charge notoriously high fees, and sifting through the debris of a failed enterprise or debt-ridden individual takes time. People who have substantial debt typically have more than one type of credit facility and may even be using one or more of them to pay off the others. This enmeshed network of credit, stop-gap measures and precariously interdependent liabilities can be particularly difficult to sort out if certain creditors become aware of previously undisclosed information or past dishonesty on the part of the debtor. This is why a Personal Insolvency Agreement may make more sense in cases where the sums, both the income and the debts, are relatively large.
The protection offered by the agreement does not extend to secured debts, either. As stated previously, creditors may still repossess the financed asset or claim the security. And if the payment plan in the agreement is not adhered to, they may take out a sequestration order against the debtor. The Personal Insolvency Agreement is a temporary or interim measure to allow the debtor time to make the repayment that they are able to, with the permission of their creditors.
This suspensory nature of the agreement may continue for an extensive period of time. Some debtors are only able to repay at an extremely slow rate, and the agreement only ends once they have settled the liabilities. They are not allowed to be appointed as the director of a company until the agreement has run its course. Their credit record will also show the blacklisting for 7 years. As an aside, the insolvency agreement process cannot resolve debts based on criminal or domestic circumstances such as fines or child maintenance.
The Personal Insolvency Agreement – the responsible choice
One of the most important advantages of a Personal Insolvency Agreement is that it enables the indebted person to retain at least some sense of dignity. People are sometimes unable to repay debt through no fault of their own. Unemployment (due to disability or retrenchment), or the reduction of household income due to death or divorce are serious and unavoidable emergencies for which the debtor is in no way liable. Sudden and unexpected shifts in market conditions can result in the collapse of businesses, even thriving ones. The PIA allows debtors to confirm their commitment to their creditors, officially and in good faith, even though they cannot support that commitment with the required financial means in the interim.
Sometimes, payment of a debt is not as important as the attitude of the defaulting debtor. If creditors are able to determine that the debtor has a sincere concern about the situation and is trying to achieve at least partial repayment of the outstanding sums, they may be less aggrieved and easier to negotiate with. This is portrayed in the concept of the creditors’ meeting, where the debtor sits down at the same table as the latter and thrashes out the issues with them. This is somehow more sensible than the expense, trauma and sometimes inordinate time-frame of litigation.
And besides, the amicable resolution of a nettlesome situation such as unpaid debt serves to eliminate tension in society and provides an example to other people as to how financial affairs should be conducted. The Personal Insolvency Agreement is an important instrument in maintaining this approach.