Life During Bankruptcy – Ending Bankruptcy Early by Composition

At any time during the three years of bankruptcy if you need to bring your bankruptcy to an end you can, by proposing a Composition (offer) to your creditors and, if creditors accept your offer – your bankruptcy is annulled – you are no longer bankrupt and you are then subject to the terms of the Composition. Your ability to propose a Composition to your creditors is provided in Part IV of the Bankruptcy Act.

Comment: We would not recommend proposing a Composition without a specific reason or purpose as it is a more expensive option than bankruptcy.

Tip: Being subject to a Part IV Composition under the Bankruptcy Act allows you to be a company director and trustee of a self-managed super fund.

A Composition is a commercial offer to your creditors which gives creditors a better result than they will achieve from your bankruptcy. A Composition can be a one-off payment or a payment arrangement over several years. Creditors are not required to be paid in full but must receive a better result than bankruptcy.

Examples of circumstances where people may wish to propose a Composition are:

  • They need to become a director of a company.
  • They are restricted from holding a registration or certification required for their work due to their bankruptcy.
  • They have a Self-Managed Super Fund (SMSF) and the assets held by the fund are not readily realisable for money to be transferred to an industry fund and the SMSF closed.

Tip: When you become bankrupt you are released from your debts at that time. If you enter a Composition, you are not released from your debts until your Composition has been completed. If you do not comply with the terms of the Composition, you will be faced with having to become bankrupt again.

A couple of points to note:

  • Case law dictates that your offer for a Composition must be a commercial offer that warrants consideration by your creditors, and
  • Your offer must give creditors a better result than they will get from your bankruptcy.
  • For your creditors to approve or reject your offer, a meeting of your creditors is convened, and creditors must approve your proposed Composition by Special Resolution (majority in number and greater than 75% in value of creditors who attend the meeting).

Your Bankruptcy Trustee will require you to pay his/her costs for reporting your proposed Composition to creditors and convening a meeting of creditors to vote on accepting or rejecting your proposal. As a guide, we expect this cost will be around the $5,000 mark. If creditors do not accept your offer, you will be out of pocket for this cost.

An offer of a Composition to creditors can involve a payment plan over say, three years or a lump sum provided by a family member or friend, or a combination of both.

From our experience, an offer of a lump sum has a greater chance of success if the monies are paid into the Trustee\’s trust account. That way, creditors are given greater certainty.

If creditors pass the Special Resolution to accept your offer, your bankruptcy is annulled upon their passing of the Special Resolution and you are then subject to the terms of the Composition accepted by creditors.

A Trustee is appointed to administer the Composition and the Trustee is normally the person who was Trustee of your bankruptcy. The Trustee is appointed by your creditors.

You submit your proposed Composition to the Trustee of your bankruptcy.

Your Trustee reviews your proposed Composition and determines whether it is a commercial offer that has merit and is worth being submitted to your creditors. If your Trustee does not view your offer as commercial, your Trustee will not progress it further. This is a good thing as you do not want to incur the cost of progressing an offer that creditors will not accept.

If your Trustee views your offer as commercial, your Trustee will investigate and report to creditors on your proposed Composition. The Trustee will report to creditors and will pass comment advising on whether your offer is recommended by the Trustee.

A time and place are set for a meeting of your creditors. At the meeting, your proposed Composition is discussed and then put to vote by your creditors as a Special Resolution.

Tip: A Composition cannot be proposed after discharge from bankruptcy, to cause annulment of the bankruptcy.

If your proposed Composition is not approved by your creditors, your bankruptcy continues without regard. You are, however, out of pocket for the Trustee investigating, reporting your proposed Composition to your creditors, and the cost of convening and presiding at the meeting.

Upon the passing of the Special Resolution to approve your Composition, your bankruptcy is annulled and you are no longer bankrupt. You are then subject to the terms of the Composition. With your bankruptcy annulled you are returned to being able to be a director of a company and Trustee of a Self-Managed Super Fund.

For further information, we recommend our article: What is a Part IV Scheme which can be accessed here.   If you have any questions on bankruptcy or would like to discuss your situation, give us a call on 1300 794 492 or email: and we will answer your questions.