Bankruptcy – Composition for Annulment – The Thin Edge of the Wedge

Over the Christmas – New Year period, my office has seen a number of bankrupts seeking to have their bankruptcies annulled pursuant to section 73/74 of the Bankruptcy Act through composition proposals paying very low returns. By that I mean below 5 cents in the dollar. These proposals have not gone unnoticed by Bankruptcy Regulation at AFSA. To be clear, we encourage parties to make the best/highest offer possible to maximise their prospects of success.

When it comes to Deed of Company Arrangements (DOCAs) and Personal Insolvency Agreements (PIAs), the threshold for practitioner recommendation/support of proposals is normally the comparison against an estimated liquidation or bankruptcy return to creditors. Courts are generally also unlikely to overturn such arrangements provided that threshold test is met. That is, unless related parties have carried the vote then other considerations start to weigh in.

Miserly is a term some judges use with respect to these proposals and Bankruptcy Regulation referred us to the 2016 case of Bendigo Adelaide Bank Limited v Clout which dealt with a proposal from Mr and Mrs Mouglalis. As the middle column of the table below indicates, the return to creditors in that case pursuant to the proposal was going to be one tenth of one cent in the dollar. Clout as Trustee had recommended against the proposal because there were outstanding areas for investigation which may have generated a better return for creditors, but creditors had approved it none-the-less. The bank appealed to the court seeking to have the composition set aside on the basis (amongst other things) that it would not benefit creditors generally. The judge agreed.

The same words “benefit creditors generally” is the test set out in IPR-175(2D)(a) for Trustees to report upon to creditors, with the answer being either yes or no. Accordingly, AFSA considers this case should be considered and applied by Trustees when preparing that report to creditors which reports upon whether a proposal will benefit creditors.

It seems to me, this is something of a grey area. Where is the line between being so miserly that a Trustee is obliged to report that the proposal is not of benefit to creditors generally. Is it 1 cent, 2 cents, 5 cents in the dollar? The judges have not quantified it to date, so the duty remains with the Trustee to discharge and provide some support for his/her recommendation. The safe play in the meantime for Bankruptcy Trustees appears to be to reference the case authority and provide some analysis/commentary as to how the proposal benefits creditors generally i.e. subject to the circumstances of the case and the following table is one of the tools I have adopted to convey that analysis.

Other typical benefits of these proposals include:

  • timely and certain return to creditors in circumstances where, alternatively, a return from the continuation of the bankruptcy may be unlikely to occur; and lower costs of administration, which consequently provides a higher return to creditors.
  • Are these proposals being accepted by creditors? We have seen good support from suppliers, debt owners/managers and even the banks. The ATO appears to be more supportive in relation to low debt levels (say below $100k) but setting unattainable benchmarks (50c/$) on larger debt, potentially a reflection of its compliance history focus over commercial considerations.

Our regulators have also advised that they would prefer not to see proposals go with the initial/statutory report to creditors. This is likely on the basis that further investigations could be undertaken by a Trustee if the proposal is put later in the bankruptcy. In some cases, no doubt this is a very solid point, however the legislation obliges the Trustee to deal with the proposal (when received) so ultimately a question for creditors to determine on a case by case basis. I encourage proposals as early as possible to minimise costs in report writing (and reading for creditors) and that in many cases the work performed will be of the same standard and in similar timeline to that of a controlling Trustee dealing with a PIA proposal.

If you see a proposal that you think does not pass the “sniff test”, we encourage you to talk with the Trustee about the surrounding circumstances, give us a call or confer with Bankruptcy Regulation. As mentioned, creditors determine the outcome through their vote and there are checks and balances available as a court override.


Article written by Malcolm Field (Director) – Perth

Are you concerned about your financial position? Contact us now for an obligation free consultation on