Former Victorian Liberal leader John Pesutto will avoid bankruptcy after the party agreed to provide him a $1.55 million loan.

Mr Pesutto was ordered to pay fellow Liberal MP Moira Deeming $2.3 million in legal costs after she successfully sued him for defamation.

He was unable to pay the debt but has been seeking donations to avoid bankruptcy and be kicked out of parliament.

On Thursday night, the party agreed to pay $1.55 million to Ms Deeming directly, with Mr Pesutto to repay the party under a commercial arrangement.

The decision, made by the party's administrative committee, means Mr Pesutto no longer faces expulsion from state parliament for bankruptcy and therefore avoids the need for a by-election in his seat of Hawthorn.

Mr Pesutto had been under a three-week deadline to come up with the money since Ms Deeming filed bankruptcy proceedings against him on June 2.

In a letter to party members on Thursday evening, Liberal Party state president Philip Davis said the party had resolved that "Moira Deeming should be paid what is owed to her, and therefore the party will contribute $1.55 million directly to Mrs Deeming".

"Mr Pesutto will be required to repay this amount to the party on a commercial loan basis, with a market-based interest rate, ensuring that the party earns additional income from this investment," Mr Davis wrote.

"Settling this matter once and for all is in the interests of the party, as it will see an end to the ongoing commentary that is letting Labor get away with their appalling performance.

"By ensuring that Mrs Deeming has been paid, there will be no Hawthorn by-election, and the State Parliamentary team can focus on the urgent needs of the Victorian community, particularly campaigning to change the government at the 2026 election."

Legal dispute began more than two years ago

The legal dispute between the two, resulting in Ms Deeming successfully suing Mr Pesutto through the Federal Court, began in March 2023 after she attended an anti-trans rights rally in Melbourne.

The event, titled Let Women Speak and described by supporters as a women's rights event, was gatecrashed by neo-Nazis.

Mr Pesutto, who was then Victorian Liberal party leader, tried to expel Ms Deeming from the Liberal Party because of her attendance at the rally; however, this ultimately backfired when she successfully sued him for defamation in the Federal Court.

The Federal Court ruled Mr Pesutto had defamed Ms Deeming on multiple occasions, including in media interviews, by implying that she associated with neo-Nazis.

Last month, the court ordered Mr Pesutto to pay Ms Deeming's legal costs, totalling $2.3 million.

After Mr Pesutto failed to pay, her lawyers earlier this month launched bankruptcy proceedings against the Hawthorn MP, giving him three weeks to pay up or face expulsion from state parliament.

Mr Pesutto has been raising funds via other means, including a public fundraising effort that has raised about $213,000.

As part of his efforts to avoid bankruptcy, Mr Pesutto and his backers approached the Liberal Party to provide a loan.

Last week, Ms Deeming offered to delay bankruptcy proceedings against Mr Pesutto in exchange for a guarantee from the party that she would be preselected for next year's state election.

Mr Pesutto rejected the offer.

On her way into parliament on Thursday morning, Ms Deeming expressed frustration about how the ordeal between her and Mr Pesutto was perceived inside the party.

"Some of them are very nice, but I really do get treated as though it is my fault and that I'm the aggressor, and that's ridiculous," she said.

Asked about her future in the Victorian Liberal Party, she said: "I assume that they will continue with their quest to annihilate me."