Case study: Composition
In 2019, Lucy's shifts at a café decreased and she had to rely on credit cards to cover her expenses. By mid-2020, she owed $30,000 to banks and became bankrupt in August 2020. The trustee of her bankrupt estate was the Official Trustee (AFSA).
In September 2021, Lucy wanted to set up a company to start her own café but she could not be a director of a company while bankrupt, unless she had court permission. Lucy's parents offered to provide money to help so she called AFSA to find out more and was told she could make a composition proposal. This is an offer to creditors to finalise debts by repaying a percentage (less than payment in full). It must also allow for payment of the expenses of the bankruptcy administration, including trustee's fees and expenses.
Lucy told AFSA that she wanted to make an offer. Her parents transferred $20,000 to AFSA to hold in trust until creditors voted on the composition proposal. They also paid for the creditors meeting costs.*
AFSA wrote a report to creditors outlining what Lucy was offering, and their investigations into the bankrupt estate. AFSA had not found anything of concern, or any assets owned by Lucy that might provide a better return to creditors, so it was recommended that creditors should accept the proposal. The creditor meeting was scheduled a month after the report was provided to creditors.*
At the meeting, the composition was accepted by creditors.
- Acceptance of an offer requires a majority of the creditors voting at the meeting to vote in favour (yes) and at least 75% in value of the voting creditors to vote in favour.
Lucy's bankruptcy was annulled (cancelled) on the date of the meeting. The National Personal Insolvency Index (also known as the Bankruptcy Register) was updated to reflect the annulment.
*Note:
- Refer to fees and charges, including the current fee for advertising a meeting of creditors.
- Timeframes for when a meeting of creditors can be held can differ. The Bankruptcy Act has statutory timeframes for creditors to submit a proof of debt to make a claim in the estate for their debts and interest claims. Timeframes also apply to payments to creditors (called 'dividends') in a bankrupt estate. Timeframes may be longer if creditors do not submit their claims or respond in a timely manner, if more information is required by the trustee to assess those claims, or a proof of debt is rejected by the trustee.