Personal Insolvency Agreements — Process, Risks & Professional Considerations

This article is aimed at outlining the purpose of a Personal Insolvency Agreement (PIA) and highlighting some key considerations individuals should weigh up before proceeding — in particular the risk of proposals that seek to deliver minimal returns to creditors.

What a PIA Is Really Designed to Do

PIA’s, are governed by Part X of the Bankruptcy Act 1966 (the Act), and allow clients faced with personal financial challenges to

• Offer a dignified, controlled alternative to bankruptcy
• Provide a structured, legally compliant path out of unmanageable debt
• Protect assets that might otherwise be at risk
• Deliver certainty to creditors

A PIA can be an effective tool, but success depends heavily on fairness, transparency, robust investigations, the ability to navigate creditor dynamics, and the ability to structure a proposal that is both compliant and commercially realistic.

Understanding the mechanics and risks is essential to assessing the merits of a proposal —particularly those proposals offering a nominal return.

How a PIA Works

A PIA begins when a debtor appoints a Controlling Trustee and submits a Statement of Affairs and draft proposal to settle their debts. The trustee then undertakes investigations into the debtor’s financial position and prepares a report comparing expected returns under the PIA with the likely outcome in bankruptcy, along with a recommendation.

A creditors’ meeting must be held within 30 business days of the trustee’s appointment, and creditors must receive the trustee’s report at least 10 business days beforehand. Particularly in larger, more complex estates, this short timeframe often makes it difficult to complete the level of investigations desired. For the PIA to be accepted, a special resolution must pass—requiring both a majority in number of voting creditors and at least 75% in value voting in favour. Often the trustee’s recommendation is a key factor for creditors.

If approved, the PIA becomes legally binding and must be executed as a deed within 21 days. The trustee then administers the agreement, which may involve asset realisations, lump sum contributions, or ongoing payments, until all obligations are completed and the debtor is released from the debts covered by the agreement.

Why Low Return PIAs Are High Risk

While PIAs can help debtors mitigate some of the more restrictive consequences of bankruptcy, low return proposals can attract heightened scrutiny and create significant regulatory and professional exposure. This has been recent focus of Australian Financial Security Authority (AFSA), the regulatory body overseeing personal insolvency. AFSA monitors PIAs for fairness and compliance.

Under Section 222 of the Act, AFSA, a creditor, or the trustee may apply to the court to have a PIA set aside if the terms are unreasonable, do not genuinely benefit creditors as a whole, or rely on false or misleading information.

One of the unique challenges in administering a PIA is the tension between speed (due to strict timeframes) and substance (of investigations undertaken and assessing the commercial merits of a proposal).

Whilst it is not uncommon for a proposal to offer a low return and be recommended by a trustee, arguably it comes with the risk of being perceived as prioritising speed or commercial gain over creditor interests. It can also undermine confidence in the trustee’s independence and judgement, trigger a regulatory review, and lead to allegations of inadequate investigation or incomplete reporting. Common concerns raised by creditors include whether the trustee has:

• properly assessed the debtor’s financial position and conducted sufficient investigations
• obtained reliable independent valuations
• provided a complete and transparent comparison with bankruptcy outcomes

To mitigate that risk, a prudent trustee would be able to demonstrate they

• Have conducted comprehensive investigations into assets, liabilities, income, and related party dealings
• Ensure transparent reporting, including clear return comparisons and context
• Obtain independent valuations to avoid understatements in assets
• Do not recommend unreasonable proposals where bankruptcy would arguably provide a better outcome for creditors or more detailed investigation would be prudent, particularly where creditor claims are significant and/or the affairs of a client are complex.

Conclusion

PIA’s can be a valuable mechanism for resolving personal insolvency, however, the legislation also leaves no room for shortcuts or guesswork, particular when it comes to low return proposals.

WCT Advisory are well experienced at successfully managing the competing legal, financial and practical factors involved to assist clients seeking to offer a credible alternative to bankruptcy.