Part 5 of the Insolvency Act 2006 enables a debtor to enter into an arrangement with creditors. Part 5 may be a good alternative for insolvent individuals who are facing bankruptcy proceedings and would like to avoid the formal restrictions that are associated with a bankruptcy.

Compositions

In the event that a debtor can put in place a composition, the arrangement will be binding on all creditors. Including dissenting creditors. The composition must be accepted by the prescribed majority (currently three quarters) of creditors and approved by the court, then a debtor is entitled to have their bankruptcy annulled. This process requires the debtor to formulate a scheme that offers creditors more than what they would receive in a formal bankruptcy.

Proposals

Proposals have a similar process as to compositions. However a proposal occurs prior to adjudication and essentially provides that if a proposal is brought about and approved, unsecured creditors cannot pursue a formal bankruptcy process against the debtor. The difference between proposals and compositions is that under a proposal the debtor is able to avoid bankruptcy completely and the procedure is much less complex.

Full Analysis

It is important for creditors to take this into account as part of considering taking action.

For a full analysis and relevant considerations for creditors, we refer you to the article by Norling Law: https://www.norlinglaw.co.nz/blog/alternative-to-bankruptcy-compositions-and-proposals.

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