Bankruptcy

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					                                               BANKRUPTCY


                          Page 1: General Questions and background



What is bankruptcy?

1.        Law which provides for the orderly division of assets amongst creditors

2.        The law of bankruptcy is wholly a creation of statue:

          1.         The Bankruptcy Act 1966

          2.         (amended Dec 1996) – known as the “Bond” amendments



Who can be bankrupt?

1.        Debtors who are NOT companies

2.        (Co’s liquidations are governed by the Corporations Law)

3.        The corporate equivalent is “winding up”



What is the point of bankruptcy? (3 aims of bankruptcy)

1.        Desire to treat all UNSECURED creditors equally amongst themselves

1.        Each creditor has an fair and equal chance to get their $$$ back

2.        The public interest of relieving the debtor from a hopeless financial position and
          retuning that person to a productive life

1.        Give the debtor a 2nd chance or fresh start

2.        The legislation retains the policy that fraudulent or dishonest debtors SHOULD be
          punished

1.        Any debtor who has tried to do the dodge and INTENTIONALLY hides money or assets
          away from creditors is penalised


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Is bankruptcy the same as insolvency?

1.        NO

2.        The term “bankruptcy” is OFTEN MISUSED

3.        Should not claim a person is “bankrupt” and MUST MAKE SURE that the entire process
          has been completed

4.        Insolvency merely describes a state of affairs in which the debtor is unable to pay
          his/her debts as and when they fall due from his/her own money

5.        Not all insolvent people become bankrupt they can avoid it through Part IX & X




Unsecured vs secured creditors



Secured creditors will simply enforce their security against the bankrupt, and only prove their
debt in the bankruptcy if there is still money owing



An unsecured creditor on the other hand has to wait until the trustee in bankruptcy gets in all
the property of the bankrupt and then he shares a proportion in the distribution from the
estate.




     Road to Bankruptcy Summary


1.        To start Commencement of Bankruptcy EITHER:

          1.         Debtor commits an act i.e. Leaves country, etc –s40(1)(c)

          2.         Creditor files a Notice of Bankruptcy under s41 giving debtor 21 days to pay
                     otherwise on 22 day BANKRUPT



2.        If a) has occurred – This is the commencement date of bankruptcy
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3.        If b) has occurred – s41 - the creditor serves a notice and receives a Judgment Creditor
          notice which is gives to the Debtor and it puts the Debtor into bankruptcy




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                        Bankruptcy Timeline (Events)
                                                                                                                                This is where
                                                                                                                                you count back
   Become insolvent / cannot pay creditors / accumulates lots of debts                                                          your 6 months
                                                                                                                                rule.

                                                                                                                                (relation back
                                                                                                                                doctrine)
          Commit an Act of Bankruptcy – s40(1)
                                                                                          This is the
                      (REFER NEXT PAGE)                                                   commencement
                                                                                          of bankruptcy
Either Filing Notice (22 days) or an Committing Act (i.e.
                     leaving country)




                                                                                                                     (6 months)
                         Creditor files a petition i.e. files a
                         Notice s41

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                                                                                                           Date which you are
Where a Sequestration                                                                                     formally “bankrupt”
                                                      Formal Hearing
   order is made                                                                                       Date which court makes
                                                                                                       an order is the “official”
                                                                                                         date of bankruptcy.



                                                                       (3 Years)




                                          End/Discharge of Bankruptcy




                                       Isn’t the date of bankruptcy and
                                       commencement the same thing?


                                                           NO




            The date is very important as prior to the date the ctt brings down the hammer,
            and you were probably bankrupt sometime before that period, the law says you
            a bankrupt from the commencement of your bankruptcy.




             It goes backwards under the relation back doctrine, from the date before the
             formal hearing and it goes back to the first act of bankruptcy that you have
             committed (eg 6 months prior) VERY VERY IMPORTANT. That period means
             that your trustee can get back all the property that you owned NOT from the
             date of B, BUT FROM THE COMMENCEMENT of bankruptcy. (good for
             creditors)
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            Claw back, in some cases the truste can go back indefinitely if he finds out that
            you have been offloading your assets with the intention to defraud your
            creditors (these provisions are very complicated, different sections and
                                                     Who initiates Bankruptcy?


                      Debtors Petition (Not common)                                      Creditors Petition (Most common)
                                                                                         (presented by a creditor or several creditors
                      (presented by the debtor personally)                               acting jointly)


                    FLM = Finance Law Materials


      What is an act of                             For a creditor to file a petition, a certain number of conditions must be fulfilled PRIOR
      Bankruptcy?                                   to the presentation.

      (s 40) (p 273 FLM)

                                                    These conditions are outlined in s 44(1)

1.        Check FLM for full list

2.        Such acts DO NOT have to                  1.         Debt owing must be > $2,000 (single or aggregated if > 1 creditor)
          be against the actual
          creditor filling the petition             2.         Amount must be owing BOTH at the time when the petition is filed AND at
          (can be against any                                  the time of the act of bankruptcy on which the petition relies
          creditor/person)                          3.         The debtor MUST have committed an act of bankruptcy within a period of 6
                                                               months immediately before the petition is filed




           All of the Acts are VERY hard to prove except for (g).                                             (s 40(1)(b))

           As there are a lot of procedural things to do and creditors do                                     1.         A conveyance/assignment that
           not have the access to the debtors private financial and                                                      would be void as against the
           personal records                                                                                              trustee in bankruptcy

                                                                                                              2.         (eg: where the bankrupt gives
                                                                                                                         away his property that would
                                                                                                                         otherwise be available for the
                                                                                                                         payment of creditors after he
     (s 40(1)(c))                                                                                                        becomes a bankrupt)

     1.      Debtor with intent to defeat or delay creditors does the
             following:
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             1.       Leaves the country (s 40(1)(c)(i))

             2.       Leaves house or place of business (s 40(1)(c)(ii))
                                                                                                      (s 40(1)(d))

                                                                                                      1.         Unsatisfied Execution

                                                                                                      2.         (against a debtor’s assets)
(s 40(1)(g)) - *****VERY IMPORTANT
                                                                                                                 1.         Creditor has obtained
3.     FAILURE to comply with a Bankruptcy
                                                                                                                            judgment in ctt against
       Notice – 21 days from date to pay up. If not
                                                                      The common                                            the debtor
       pay, this is ‘commencement date’
                                                                      acts of
                                                                                                                 2.         And the debtor hasn’t
4.     (MOST COMMON)                                                  bankruptcy                                            paid the judgment debt.
5.     99% of creditors Bankrupt their debtors with                   include:
                                                                                                      Then the sheriff’s office seizes the
       1 of these
                                                                        PAGE 273 FLM                  debtor’s assets to satisfy the debt etc.
6.     It is the personal equivalent to a statutory
       demand in co law




        Bankruptcy Notice Example:

        1.       This means that the creditor has obtained judgment against the debtor, & then when
                 the debt is not paid, he can issue a bankruptcy notice against the debtor.

        2.       If the debt is not paid within the time specified, the debtor has committed an act of
                 bankruptcy.

        3.       However note that the bankruptcy notice must be very carefully prepared, or the
                 Bankruptcy proceedings on which it is based can then fail.




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                                                            Bankruptcy Notices:

What is a Bankruptcy notice? (s 41)                                                 Who can serve (issue) a Bankruptcy notice?

1.     It is a formal document which DEMANDS that                                   1.         Must be a JUDGMENT CREDITOR
       the debtor pay a judgment debt or as much of
                                                                                               1.         (creditor who has gone to ctt and got a
       it that remains unpaid.
                                                                                                          judgment debt issued)
2.     The notice must be in the prescribed form and
       must state the consequences of non-                                          2.         Creditor must be owed > $2,000
       compliance                                                                   3.         Debtor must NOT have any of the following:
3.     The debtor has 21 days to pay up. If on day 22,                                         1.         Any defences (to clear debt)
       still no payment or has not reached an
       agreement to the satisfaction of the creditor,                                          2.         No counter claim (eg defective goods)
       then on THIS day you HAVE committed an act
                                                                                                          1.         If so it would be a commercial
       of Bankruptcy.
                                                                                                                     dispute & not a Bankruptcy
                                                                                                                     dispute

                                                                                               3.         Has not had a stay (ie any protests)




                             Presentation / Requirements of a creditors petition (s 47)




                   1.         The petition must then be verified by an affidavit

                   2.         Sworn statement sworn by 1 of the class of people that can give stat decs




       Formal Hearing

       1.         Then there will be a FORMAL hearing to get a formal date

       2.         The date you go to ctt & the date the court gives its order is a technical date
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       3.         It Questions to that you are Jobs.
            Notes andis the dateLaw Clerkships andFORMALLY B

       4.         It is the date that you begin (count the 3 yr period)
                 Sequestration order (s 52(1))

                 Seizing property that belongs to someone else and holding it
                 until profits pay the demand for which it was seized




                                                             THEN




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                                     Now that Bankruptcy has been established

                                                        What happens next?

Effect of bankruptcy on debtor (s 58)                                         Effect of bankruptcy on creditors

1.     Subject to a few minor exceptions, all of the                          ***REMEMBER secured creditors stand OUTSIDE
       debtor’s property will be vested immediately                           bankruptcy
       to the registered trustee, or an official trustee.

2.     Any property owned at the date of the B vests
       to trustee (s 58(1)(a))                                                The trade creditors are the all heavily hit on this 1

3.     Any “after-acquired” property (property                                Eg, plumbers, electricians, credit cards debts, utilities
       acquired by the debtor on or after the date of                         etc
       the bankruptcy and before discharge) also
       vests to trustee (s 58(1)(b))
                                                                              Position of creditors (s 58(5))
1.     This means that you DO NOT want to win
       powerball                                                              1.         If the security does not realise the full amount
                                                                                         of their debt, they can prove in their
                                                                                         bankruptcy, the unsecured creditors are
                                                                                         prohibited from bringing in any debt
                                                                                         enforcement proceedings you cannot sue any
                                                                                         longer.

No debt enforcement proceedings (s 58 (3))                                    2.         Creditors have converted their right to sue in
                                                                                         contract law for the debt to a mere right to
1.     There is a stay of existing proceedings                                           prove in bankruptcy.
2.     If you as a creditor have already started to sue
       the bankrupt, THEN there is a stay or
       monitorance over existing proceedings you
       can’t go ahead with them




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                                                             Division of property


                                                                                         Priority payments to creditors (s 109)
Proof of debts                                                                           Big list on pg 283-284 of FLM
All unsecured creditors must prove that the debtor actually                              But main 1 is the 2nd 1, the trustee is has priority
owes them money                                                                          over any costs charges and expenses incurred by
Must prove this to the trustee (s 82 – s 102)                                            the controlling trustee




3.      Proof of debts is an important procedural matter,                                If there is nothing then it goes to a government
        the unsecured creditors bring up all of their invoices,                          receiver who gets appointed and gets a salary.
        documentation & evidence of the debt & they                                      Private trustees are more efficient in getting in the
        present it to the trustee (who accepts or rejects their                          assets
        debts).

4.      However some debts are not provable in bankruptcy
        (unliquidated debts, eg if someone has sued the
        debtor in a personal injuries matter & their debt is
        unliquidated (ie haven’t specified an exact amount),
        it is NOT a provable debt.                                                  Exempt property (s 116(2))

                                                                                    1.         Family house (& household items) – pg245

                                                                                    2.         Income (to threshold)

                                                                                    3.         Superfund & life insurance policies

                                                                                    4.         Personal injury claims

                                                                                    5.         Tools of the bankrupt’s trade
 Pari passu rule (s 108)
                                                                                               (s 116(2)(c)(1)) - $3150)
 There is an equal treatment of all creditors
                                                                                    6.         Cars ($6150 = current amount (indexed from $5k)
 And each will be paid proportionately                                                         (s 116(2)(ca)) This is the amount of equity in the
                                                                                               car (ie value less sum owing under finance)




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                                      Doctrine of relation back (s 115 & s 116)

                   This is used by the trustee to go back to get more stuff from the debtor, goes
                   back to time of the commencement of bankruptcy




                              How is the commencement of bankruptcy calculated?




1 offence of Bankruptcy                                                     >1 Offence

Only 1 offence?                                                             If >1 offence, then Bankruptcy commences at
                                                                            the time of the 1st act which occurred within a
Then this MUST be the act which formed the                                  period of 6 months prior to the filing of the
basis for the creditors petition. Therefore
                                                                            creditors petition
bankruptcy commences at the of THAT act




    ***NOTE

    1.         As a creditor YOU WANT the commencement to be as FAR BACK as possible

    2.         THIS ALLOWS the trustee to INCREASE the amount available for distribution

    3.         The transactions the trustee will be looking at are 1s with related parties, eg family
               members, or dealings, colleges business associates.

    4.         Onus is on the transferee that you must make this defence

    5.         Payment in must be good faith and without notice of B to be “OK”




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Exceptions (property which trustee CANNOT take)

Defence in s 123 – it forgives transactions between the relation back day (ie commencement of
the bankruptcy – ie 1st act of bankruptcy) and the sequestration order, which are:

     1. in good faith

     2. in the ordinary course of business

     3. made without notice of the presentation of the petition against the debtor.

     4. HOWEVER it is subject to the rules about preferences set out below.

     5. An example is the sale of property at market value

     6. Or transactions which have occurred “at arms length”




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BANKS and bankruptcy



Bank transactions (s 123)

1.        Case: Re Keever; Ex parte Midland Bank

2.        K had an a/c with defendant bank which was overdrawn

3.        Committed an act of Bankruptcy

4.        Bu received a cheque of an amount which was in excess of the overdraft

5.        Paid cheque into a/c for collection

6.        Cheque cleared on the day K was adjudicated a bankrupt

7.        Bank was held entitled to succeed by arguing it had a lien on the cheque on the day it
          was paid in and they had NO notice of the act of bankruptcy)



Bank pays a cheque of a person who became bankrupt (s 124)

Case: Re Hasler

1.        After date of Bankruptcy the debtor wrote 2 cheque which were paid upon presentation
          by the bank

2.        The trustee applied for an order that the bank pay the sum to him

3.        Main issue:

4.        Had the bank paid without negligence?

5.        Held NO, Branch managers were instructed to read bankruptcy info in a # of
          publications and, in particular the bank supplied branch mangers with a particular
          publication which had info that H had a creditors petition presented and was later
          adjudicated a bankrupt

6.        Ctt held bank as liable for the amount



Other duties on Banks (s 125)

1.        If a bank finds out that a customer is an undischarged bankrupt it MUST inform the
          trustee in writing
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2.        There must be no further payments out of the a/c

3.        EXCEPT under the written instructions of the trustee or a ctt order (s 125(1))




After acquired property (s 116(1))

     Property acquired after sequestration order & before discharge from bankruptcy

     Is all paid to the trustee (within the 3 year period)



     Examples:

1.        Will

2.        Powerball

3.        Windfall gains




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                                                 Division 4B

          The aim of the divisions is to require a bankrupt who derives income during the
          bankruptcy to pay contributions towards the bankrupt's estate and to enable the
          recovery of certain money and property for the benefit of the bankrupt’s estate



          ***NOTE: Any interposed entity with PSI divert income is same as tax part IVA
          anti avoidance

      What is included income? (definition – s 139L)

                 1.         Ordinary income

                 2.         Fringe benefits

                 3.         Gifts & loans provided to B

                 4.         Trust income

                 5.         Any benefit from any: accommodation, entertainment of FBT

                            1.         Trustee can recoup them as if they were income




                                 Contribution payable by bankrupt (s 139S)



                   = Actual income – Actual income threshold amount

                                                              2




                            Where the threshold is:



                                 Dependants                Amount

                                       0                 $37,537.50

                                       1                 $44,294.25
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                                        2                 $47,627.63
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                                       3                 $49,549.50

                                       4                 $50,300.25
          Property of controlling entities

          1.         s 139A – H (not in FLM)

          2.         Essentially PSI and anti-avoidance

          3.         Aim B’s income disguised as income of entity controlled by B
                     (contractor)

          4.         If B provides services to controlled entity for inadequate
                     remuneration

          5.         trustee may recover

                     1.         property acquired by controlled entity s 139D

                     2.         increase in entity’s net worth




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                    Property Recovered from Bankrupts Creditors & other parties

             1.        Any transactions or transfers which have been undervalued, or have the aim or purpose
                       to defeat creditors will be held void (3 types)


Undervalued transactions (s 120)                                                                      Exceptions:

Which took place within 5 years BEFORE the commencement of the                                        If the transfer was >2 years before
bankruptcy                                                                                            bankruptcy AND the transferor was
                                                                                                      SOLVENT at the time, the transfer isn’t
     1. where < market value is given                                                                 void (ie yrs 3-5 prior).
     2. OR where NO consideration is given (ie gifts)                                                 Any maintenance agreement or order



        NOTE:                                                                                         If the trustee does reverse the
        3.        Love and affection is NOT consideration.                                            transaction (s 120(4))

        1.        Apply Objective test:                                                               He/she must PAY the transferee an
                                                                                                      amount = to the value of any
        2.        Is it reasonably a genuine gift? Or is it an undervalued                            consideration that the transferee gave
                  transaction                                                                         for a transfer that is void

        3.        Look at usual way that gifts given, gifts are meant to
                  be bona fide




Transfers of property made to defeat creditors                                                        Exclusions: (s 121(4))

(Fraudulent dispositions) (s 121)                                                                     2.         Transfers which was given in full
                                                                                                                 market value consideration of
1.      The main purpose was to:                                                                                 property
        1.        Prevent property being available to creditors

        2.        Hinder or delay creditors                                                           Or the transferee could NOT reasonable
        3.        Or it is deemed to be the main purpose                                              have inferred that at the time of the
                                                                                                      transfer, the transferor was, or about to
        4.        AND at the time of the transfer, the transferor WAS,                                be insolvent
                  or WAS ABOUT to be, insolvent.


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Avoidance of preferences (s 122)

Did the insolvent debtor make a transfer in favour of a creditor (for a certain creditor to gain an advantage or
preference?)



                                       ANSWER: Yes, then transfer is VOID. NO, transfer is ok




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              Property Recovered from Bankrupts Creditors & other parties (cont)

                                         Avoidance of preferences (s 122) (cont)




Common Example:
                                                                                             Exceptions:
NOTE normal creditors who put pressure on, will NOT come
under s 122                                                                                       Creditor must have acted in:

                                                                                             1.        good faith

Eg. Telstra, electricity is overdue etc                                                      2.        ordinary course of business and

Unlikely that those utility providers will be caught                                         3.        provided valuable consideration

They do this as a matter of course, common buss practice,                                    4.        deemed lack of good faith
doesn’t mean that they know or suspect, they are at arms
length, it is what they do for all customers                                                 5.        -s 122(4)(c)



If this is the case, (not relation back time) different date, VP
can be set aside within 6 months of the ctt




        Case: Re Stevens

        1.        Transaction only needs to have the effect of giving a preference

        2.        IT IS IMMATERIAL what was in the mind of the debtor or creditor



        Case: Re Weiss; Ex parte White v John Vicars

        1.        Creditors NET position must have improved


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2.        Otherwise no effect of giving preference

3.        Case already had an equitable mortage, gained legal mortage

4.        NO EFFECT, therefore NO PREFERENCE



Case: Re Simpson

5.        If Creditors gets greater rights, then there is preference

6.        New bill of sale placed 1 which was needed for registration




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Alternatives to Bankruptcy – Low Income Earners


If debtor doesn’t fulfill this arrangement – considered act of bankruptcy



1.        These are arrangements between debtors and creditors which avoid bankruptcy.

2.        During time of part 9 and 10 no proceedings can be taken, relieved from being sued



Debt Agreements Part IX of the Act (s 185 – 185R)


What is it?

An alternative to Part X arrangements

Part IX is used for low income earners, people with low net worth

Basically a simplified version of Part X

Much more informal and simplified, and more flexible.

May require, some income or financial counseling, monitoring

And may ask for some assets to be given



Process is controlled by ITSA,

They will help you draft up the agreement not as technical as Part X



What happens?

Trustee works on behalf of ITSA, they put it to creditors

They organise meeting but doesn’t have to be an actual meeting

Can be org by electronic voting procedure or paper voting


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However, creditors must still have a 75% (special resolution)



Who can enter into a Part IX Debt Agreement? (s 185C(1))
A debt agreement can be proposed by a debtor who has -

1.        Not been bankrupt, utilised a debt agreement or given an authority under Part X of the
          Bankruptcy Act in the last 10 years

2.        After tax income < $54,927.60

3.        Unsecured debts < $73,236.80

4.        Property not exempt under bankruptcy valued < $73,236.80




Other notes:

1.        A debt agreement proposal goes to the Official Trustee under s 185C(1).

2.        The effect of a debt agreement is that there is a distribution of property to creditors
          under s.185L, either proportionately or by other agreement to the contrary.

3.        The debtor is released from his debts – s 185J

4.        There is no further enforcement of these claims by the debtor – s 185K




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Part X Arrangements - HIGH INCOME EARNER

If debtor doesn’t fulfill this arrangement – considered act of bankruptcy



Best entered into by high net worth individuals

On high income

With a substantial amount of assets



If low income and low net worth – this will be too complicated and will cost too much



To be successful, a SPECIAL RESOLUTION must be passed (>75% debts holding)

Creditors who hold 75% of the debt will decide your future



Appoint trustee

Set up a meeting of your creditors

You propose an agreement to them to allow you to escape formal consequnes of B

Many cases it continued to let you manage a corporation and you can stay in your buss if you
wanted too

Whether or not the deal was accepted depended on the meeting of your creditors and the
report that your controlling trustee provided



Basically 2 meetings

1 to tell them u are in the shit

And then to put prosal and then vote on it




1. Composition (s 238-40)
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1.        Creditors agree to accept payment of their debts by installment

2.        OR agree to accept a LESSER amount in full satisfaction of their debt (s 238)

          1.         Note that all creditors must be treated equally in a composition.



2. Deed of Assignment (s 228-30)

1.        Debtor transfers all divisible property to a trustee for the benefit of creditors in
          exchange for immediate release – s.213 and s.228

2.        The deed binds all creditors, so that no creditor is able to present a creditor’s petition or
          sue the debtor on the existing debt.

3.        Pretty much you just give everything you own to the creditors and call it even



3. Deed Of Arrangement (s 233 & 234)

4.        A deed between debtor & the trustee which provides for some arrangement of the
          affairs of the debtor with a view to the payment of the debtor’s debts either in whole or
          in part – s 213 and s 233



This is designed to allow the debtor to trade out (work out) of his difficulties.



Note that many of the steps in Part X are acts of bankruptcy under s.40(1)(I) to (n) on which a
bankruptcy petition can be founded (ie if you fail to fulfill a Part X arrangement you have
COMMITED an act of bankruptcy)

Advantages of Part X

You have some control over the deal you put to your creditors

You can rehabilitate yourself, don’t have to tell everyone you are bankrupt

More freedom



Disadvantages of Part X

However it will still go on the NPII (national personal insolvency index)
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It is expensive due to supervision

Must put all this in under s 188 of the Bankrupt act, must provide statement

A meeting of creditors under Part A is an act of B




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