Postal vote: resolutions by proposal under the IPS (Bankruptcy)

Before the reforms of the Insolvency Law Reform Act1 to the Bankruptcy Act,2 obtaining a creditors’ resolution required bankruptcy trustees to call a potentially costly meeting of creditors.  The recently implemented Insolvency Practice Schedule (Bankruptcy), however, provides “proposals” that allow bankruptcy trustees to potentially obtain creditors’ resolutions, in effect, by postal vote – and without the need for a creditors meeting.

Basic nature of proposal

Among the many reforms effected in Schedule 2 of the Bankruptcy Act, the Insolvency Practice Schedule (Bankruptcy) (Schedule) is the proposal mechanism: essentially, a means of passing a single creditors’ resolution without calling a creditors meeting.

To pass a resolution by proposal under the Schedule, a bankruptcy trustee must first circulate written notice of the proposal amongst all unsecured creditors who have admitted proof of debts or particulars of their debts.  Both ordinary resolutions and special resolutions can be passed in this manner.

An ordinary resolution (for example, for approval of remuneration of a bankruptcy trustee under section 60-10 of the Schedule) is passed by proposal if within the timeframe set out in the notice of the proposal:

  • a simple majority of creditors by value of debt respond to the proposal with a “yes” vote;
  • a simple majority of creditors by number respond to the proposal with a “yes” vote; and
  • less than 25% of the creditors by value of debt do not respond objecting to the proposal being resolved without a meeting of creditors.

The proposal then takes effect as if it were a resolution passed at a meeting of creditors.

A special resolution (for example, to annul a bankruptcy under section 74 of the Bankruptcy Act) is passed by proposal if within the timeframe set out in the proposal:

  • a simple majority of creditors by number respond with a “yes” vote;
  • 75% of creditors by value of debt respond with a “yes” vote; and
  • less than 25% of the creditors by value of debt do not respond objecting to the proposal being resolved without a meeting of creditors.

The proposal takes effect as if it were a special resolution passed at a meeting of creditors.

Formalities of notice

The Schedule requires that the notice of a proposal circulated among creditors:

  • contain only a single proposal in writing; and
  • include a statement of the reasons for the proposal and the likely impact it will have on creditors if passed.

The Schedule provides that the bankruptcy trustee must send the notice to each creditor entitled to receive notice of a meeting of creditors, and invite the creditor to either:

  • vote yes or no on the proposal; or
  • object to the proposal being resolved without a meeting of creditors.

The Schedule further requires that the notice should specify a reasonable time within which creditors’ replies must be submitted.  However, the Insolvency Practice Rules3  also requires that creditors be given at least 15 business days (i.e. three weeks) “after the day the notice is given” concerning a proposal to reply to a proposal.  This suggests the shortest timeframe a bankruptcy trustee can set for eligible creditors to provide their response to a proposal would be three weeks (or 15 business days).

When might a proposal be appropriate?

The IPRB provides some guidance as to where a proposal should be considered instead of a creditors meeting to resolve a resolution of the bankrupt’s creditors.  Rule 42-60 of the IPRB requires that in conducting an administration, a bankruptcy trustee must:

  • incur only those costs that are necessary and reasonable; and
  • before deciding whether it is appropriate to incur a cost, compare the amount of the cost likely to be incurred with the value and complexity of the administration.

Further, rule 42-75 of the IPRB requires a trustee must consider whether the matters sought to be addressed at a meeting of creditors:

  • require the holding of a meeting; or
  • could be addressed more cost effectively by another form of communication with creditors.

Although it will ultimately fall to the courts to determine the proper application of these provisions, these rules indicate a likely legislative intent for bankruptcy trustees to consider quick and cost-effective alternatives to creditors meetings, including obtaining resolutions by proposals through the mechanism set out in the Schedule.

Lavan comment

Proposals represent a potentially quick and efficient means of resolving all manner of disputes amongst creditors, the bankrupt and the trustee that otherwise would require the cost and hassle of a creditors meeting.  In consideration of the novel duties imposed under the IPRB concerning the minimization of costs in the conduct of a bankruptcy, bankruptcy trustees should take time to familiarise themselves with the requirements for securing an effective resolution or special resolution by proposal.