Personal insolvency proposals are common place in Australia but rarely ever used in New Zealand.

If successful a proposal under Part 5 of the Insolvency Act 2006 can avoid an individual being made bankrupt. Rules of personal insolvency proposals vary from some standards that apply to company compromises. These include:

  • a) The need for the Court to approve the proposal.
  • b) Preferential creditors not being entitled to vote.
  • c) Secured creditors being allowed to vote for their full debt.

However the normal voting thresholds for all insolvency matters (majority in number 75% in value) does apply.

Personal insolvency proposals usually involve an individual settling their debts at a discount.

It is necessary for a meeting of creditors to be held. The quorum at the meeting is 2 creditors. Creditors may be represented at the meeting by any party they so desire. At the meeting the insolvent must attend, unless is prevented from doing so due by illness or other significant cause.

Normally a Part 5 proposal would result in the following:

  • a) Creditors receiving a higher return than would occur under bankruptcy.
  • b) The debtor being allowed to continue to beself-employed.

    • c) A reduced burden on the tax payer by way of reduced administration costs, and the need for benefits.

A recent example where a proposal under the Insolvency Act 2006 resulted in a benefit for both the debtor and his creditors based on the following circumstances applying:

  • a) The debtor being an overseas professional that would have lost his job on bankruptcy.
  • b) The majority of his liabilities being made up of guarantees to four banks/finance companies.
  • c) Only one of the lenders was seeking bankruptcy, with this lender being owed less than 25% of the debt.
  • d) A family advance of $50,000 being made available immediately.
  • e) Surplus income of $25,000 per annum being available to fund a significant payment to creditors over 5 years.

The majority of creditors were happy to accept a dividend of .10cents in the dollar. An application to the Court to approve the proposal was successful without query.

For further information please contact Tom Rodewald on 021 22 77 408