Bills Digest 10 1996-97 Bankruptcy Legislation Amendment Bill 1996


Numerical Index | Alphabetical Index

WARNING:
This Digest is prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest was available from 23 July 1996

CONTENTS

Passage History

Bankruptcy Legislation Amendment Bill 1996

Date Introduced: 26 June 1996
House: House of Representatives
Portfolio: Attorney-General and Minister for Justice
Commencement: Proclamation, but no later than 6 months after Royal Assent

Purpose

The purpose of the Bill is to amend the Bankruptcy Act 1966 and the Administrative Decisions (Judicial Review) Act 1977, to assist in modernising the law on personal insolvency. Key provisions in the Bill include simplified processes for low income minor bankruptcies, and tightening of the provisions dealing with those who divest themselves of property to third parties when facing bankruptcy.

Background

[Note: In recognition of the specialised nature of bankruptcy law combined with the significance of the proposed amendments, the following represents an expanded Background. More specific references to provisions in the Bill are found under Main Provisions, below.]

Australian bankruptcy law applies to an individual who is unable to pay his or her debts. The Commonwealth's Bankruptcy Act 1966 is a law made pursuant to section 51(xvii) of the Constitution. Company insolvency matters are regulated separately by the Commonwealth's Corporations Law. In contrast, in the United States, bankruptcy for individuals and insolvency for companies are covered under a single Bankruptcy Code. Sometimes the words bankruptcy and insolvency are used interchangeably. The matter is further complicated in Australia by the application of essentially the same procedures for some aspects of bankruptcy for individuals and insolvency for companies. Basically, individuals commit the act of bankruptcy while companies become insolvent.

The primary aim of modern bankruptcy law is to enable the debtor to identify his or her accumulated debts, make whatever contribution is possible and then allow the debtor to make a fresh start. In earlier times (commencing at the end of the 13th century in England), debtors could be imprisoned for non-payment of their debts.(1)

Administration and Oversight of Bankruptcy Matters

When an individual becomes bankrupt his or her property and finances are placed in the hands of a trustee in bankruptcy. In most cases, the trustee is the Official Trustee (or within that system, an Official Receiver). In a smaller number of cases, the trustee in bankruptcy is an accountant who must be registered under the Bankruptcy Act 1966, following his or her appointment by the Federal Court. Where no registered trustee is available the responsibility always falls to the Official Trustee in bankruptcy, who is a statutory appointee. Official Receivers (there is one for every bankruptcy district in Australia) act on behalf of the Official Trustee. Some 92% of all bankruptcies are administered by the Official Trustee. The remaining 8% are administered by private sector registered trustees.(2)

The administration and oversight of bankruptcy matters are carried out by the Insolvency and Trustee Service Australia (ITSA) which is a Division of the Attorney-General's Department. The administrative head of ITSA is the Inspector-General in Bankruptcy. The Official Trustee is a body corporate under the Bankruptcy Act 1966 and, as noted above, trustee functions are carried out by Official Receivers in the various bankruptcy districts.

The first step in the bankruptcy process is usually when a person petitions for his or her own bankruptcy. In 1993-94 approximately 83% of all bankruptcies resulted from a debtor's voluntary petition.(3) Alternatively, a creditor may decide to seek the issue of a bankruptcy notice against a debtor who has defaulted on payment of a debt.

Presently, bankruptcy notices are issued by Registrars in Bankruptcy based in the Federal Court. In each State and Territory, the Registrar in Bankruptcy is the District Registrar of the Federal Court. The property of the debtor comes under the control of the trustee in bankruptcy, on bankruptcy. There is interaction (and overlap) between ITSA and the Registrars in Bankruptcy in formal record-keeping and documentation associated with the administration of bankruptcy matters. To the public, however, this system creates two separate Commonwealth bodies with whom the public must deal i.e. the Federal Court's Registrar in Bankruptcy, and ITSA.

The Federal Court plays an essential role in the determination of rights and obligations under bankruptcy law but it is considered that the administrative day-to-day record keeping and documentation procedures in bankruptcy could be handled by one agency i.e. ITSA. The Bill proposes the concept of a One Stop Shop with the transfer of certain administrative functions from the Federal Court to ITSA. The office of Registrar in Bankruptcy (and Deputy Registrar) now located within the Federal Court will be abolished. The One Stop Shop approach will also provide the opportunity to more effectively implement an educative process in informing members of the public of the options (including alternatives to formal bankruptcy) available when personal insolvency occurs.

The primary aim of this reform is to allow the ordinary debtors who voluntarily file for bankruptcy to deal with ITSA alone, and to have their affairs processed more promptly by the one Commonwealth agency, thus avoiding the present exchange of documentation between the Federal Court and ITSA.

A further advantage of this proposed reform is the reduction in the number of documents which would otherwise be filed by the trustee in bankruptcy with the Federal Court, thus reducing administrative costs.

Property and Other Transactions Prior to Bankruptcy

As part of the bankruptcy process, a debtor can be subjected to a public examination in court as to dealings in his or her property. Certain transactions entered into prior to the petition for bankruptcy are subject to what is known as the doctrine of relation back. This simply means that certain transactions are rendered void, as against a claim by the trustee, and the money or property must be handed over to the trustee to be made available for creditors. Basically, a bankruptcy is said to commence on the occasion of the first act of bankruptcy within a period of 6 months before the actual date of presentation of the petition. In certain circumstances, other property 'settlements' dating back as far as 5 years can be challenged by the trustee.

In the matter of settlements of property prior to bankruptcy, some transactions may appear to have depleted the now bankrupt's assets. The law, at present, looks to the intention of the parties and the nature of the settlements. The Bill proposes to change the test for determining whether these prior settlements are immune from claims by the trustee for the benefit of creditors, by introducing a simpler test. If the now bankrupt transferred property to another person for no consideration or for less than the market value, those transactions (which occurred prior to bankruptcy) can be subject to a claim by the trustee. The test will be one of whether at the time of the transfer of the property the now bankrupt was solvent (nb: the Bill inserts the definition of 'solvent' from section 95A of the Corporations Law - see Item 20 in Schedule 1 to the Bill. See also, Items 213 and 327).

The proposed amendments will now place the emphasis on the likely effect on creditors of that earlier transaction. There are limited exemptions to recognise that some specified transactions are permissible and these include a transfer to meet all or part of a liability under a maintenance agreement or maintenance order (See Item 213 in Schedule 1 to the Bill).

Insolvency Administrations Outside of Actual Bankruptcy

Under the existing Bankruptcy Act 1966, a person who is facing a serious financial crisis may enter into what is known as a Part X arrangement, which is a step short of actual bankruptcy. Part X, presently, offers three options. The options are:

  • a deed of assignment - the debtor's property is handed to a trustee who divides the property for the benefit of the creditors; the debtor is released from those debts which would otherwise have comprised his or her bankruptcy;
  • a deed of arrangement - the debtor's financial affairs are administered for him or her which may include running the debtor's business or assigning future income; and
  • a deed of composition - creditors accept less than the full amount of the debt as full satisfaction, or agree to a schedule of instalments.

The Bill proposes amendments which will simplify the procedures involved in establishing and administering Part X arrangements. The functions of a solicitor or trustee to whom the debtor issues an authority to deal with the debtor's property will be made uniform. At present, different procedures apply when a solicitor acts compared to a registered trustee. The practical result, however, to the creditors and the debtors is the same.

The Bill also proposes to establish a conclusion to the time that a debtor's property is subject to control under a Part X arrangement. At present, control over the debtor's property can continue indefinitely if creditors do not agree to release the debtor's property.

A new form of debt administration will be introduced. This is a simplified form of a Part X arrangement and it will be known as a Part IX - Debt Agreement. This simplified process will apply to debtors whose level of liability is below about $52,000 (i.e. 7 times the basic rate for a partnered pension - this threshold figure is also indexed to movements in the basic pension rate, and may be varied by Regulation). The proposed simplified process will not necessarily utilise a trustee but can operate by a simple circulation by the Official Trustee of a debtor's proposal for a payment of less than the full amount, periodic payments or obtaining financial advice. The option of the formal appointment of a trustee, however, still remains. The Official Trustee will examine the debtor's proposal to determine whether it is an arrangement which is likely to be acceptable to creditors.

Voting on acceptance of the debtor's proposal requires a resolution representing 75% of the value of the debt and a majority of the creditors.

Duties of Trustees

The Bill introduces new duties for trustees. Essentially, these duties impart a more commercial orientation on trustees in bankruptcy. In simple terms, a trustee will be required to report to creditors within 3 months on the specific issue of whether creditors can expect a dividend. In addition, trustees will be required to administer bankrupt estates with a duty to avoid unnecessary expense.

A further modification in the Bill is the proposal that the Inspector General becomes the sole registering authority for trustees. At present, primary registration is a function of the Federal Court. In addition, the lodgement of an up-front bond by trustees will be replaced with a system of insurance.

Income Contribution from Bankrupts

A key proposal in the Bill is the revision of Division 4B of Part VI of the Bankruptcy Act 1966 following the majority decision of the Federal Court in the case of Bond v Trustee of Property of Bond (A Bankrupt) (1994).(4) An explanation of that decision can be found in the Parliamentary Research Service's Current Issues Brief Income Contribution from Bankrupts: A Recent Federal Court Decision.(5) It is important to note that Mr Alan Bond is no longer a bankrupt and the discussion of his case in this Bills Digest relates only to the issues involving the provisions of the Bankruptcy Act 1966 and the proposals in the Bill. Mr Bond was released from bankruptcy in late February 1995.

The income contribution scheme was introduced into the Bankruptcy Act 1966 in 1992 and commenced operation on 1 July 1992. Basically, the scheme provides that a bankrupt who, through expertise, professional calling or fringe benefits, is able to continue to receive a comparatively high income or enjoy a comparatively affluent life style while technically bankrupt, then he or she should contribute some of that 'excess' income to his or her creditors.

Stated simply, a formula was applied which established a permissible income threshold based on 3.5 times the basic pension (with some increase for dependents or child support) the amount of excess income above that threshold is divided by two with one half going to creditors via the trustee. As a rule of thumb, once a bankrupt starts receiving in excess of $26,000 per annum (after tax, where applicable) he or she is liable to make an income contribution of half of the amount above $26,000.

In the Bond v. Trustee of Property of Bond (A Bankrupt) case, the trustee classified the provision of over $700,000 in terms of housing, office expenses, travel, telephone and legal expenses to Mr Bond by family and associates of Mr Bond as fringe benefits and therefore income related. An assessment was made by the trustee (Mr Ramsay) of a substantial income contribution to be made by Mr Alan Bond. On appeal to the Federal Court, a majority 2:1 decision found in favour of Mr Bond. The $700,000 worth of payments were held to be gifts. The Federal Court decision says that the definition in the Bankruptcy Act 1966 is confined to payments made in the context of employment. The correction of the existing provision in the legislation is addressed by this Bill.

The Bill attempts to restore what was intended in the original amendments in 1992 dealing with income contribution from bankrupts and the provision will now also cover loans to bankrupts. See Items 252-256 in Schedule 1 to the Bill.

Digest Comment: Retrospectivity

The proposals in the legislation are commendable in that they aim to streamline procedures under the Bankruptcy Act 1966 and make the system of bankruptcy law more effective and less costly. There is one issue which should be noted and that is that bankruptcy involves, by definition, a retrospective process. Consequently, any significant modification to the law produces a retrospective effect. In simple terms, there may have been property settlements which previously complied with the law as it then stood but which will now be open to closer scrutiny by these amendments. On one view, such a development is overdue because of the apparent ease in which a small number of bankrupts may have been able to alienate significant assets from the reach of creditors. The retrospective effect is, however, noted.

Also noted is that the retrospective effect for this proposed legislation will be confined to new bankruptcies after the commencement of the amending legislation. The options available to the Government were immunity from retrospectivity; alternatively, complete retrospectivity for all bankruptcies including current bankruptcies which are still within the relation back period; or, a middle course, confining the retrospective effect only to new bankruptcies after the commencement of the legislation. The Bill utilises the middle course with the revised provisions applicable to all new bankruptcies after the commencement of the amending Act.

Main Provisions

[This Bill largely restates the provisions of the Bankruptcy Legislation Amendment Bill 1995 which was originally introduced into the House of Representatives on 8 March 1995 but which lapsed in the Senate when the Parliament was prorogued for the 1996 General Election. During its previous passage the earlier Bill was examined by the Senate Legal and Constitutional Legislation Committee in its report, Bankruptcy Legislation Amendment Bill 1995, of September 1995. This Bill contains changes resulting from the acceptance of the recommendations contained in the majority report of the Committee.]

[This Bill implements the proposed amendments by way of Schedules to the Bill. Consequently, the Main Provisions will be referred to as Items in the Schedule rather than as Clauses in a Bill.]

Schedule 1 to the Bill

Item 1 removes from subsection 9(4) of the Administrative Decisions (Judicial Review) Act 1977 the conferring of Commonwealth jurisdiction on State courts to review conduct or a decision made under the Bankruptcy Act 1966. Essentially, this is the process for review of administrative decision-making. Such matters will now be confined to the Federal Court of Australia and the High Court. A bankruptcy matter, per se, will still be able to be dealt with by the Supreme Courts under Commonwealth cross-vesting legislation, in appropriate cases.

Items 2-20 insert a number of new or modified definitions into the Bankruptcy Act 1966. These definitions include statutory recognition of the National Personal Insolvency Index (NPII). This is an index of bankruptcy and insolvency matters available for public inspection. An index has been available in the past but it was an administrative arrangement rather than a formal requirement under the legislation (see Item 9 and proposed new section 315 at Item 451).

Item 21 inserts a proposed new section 5AA which provides a reference table for identifying the 'place of origin' for a bankruptcy matter. For example, the most common form of bankruptcy is a voluntary petition by the debtor. The place of origin will be the Bankruptcy District in which the petition is lodged. A Bankruptcy District, presently, equates with a State or Territory. This means that if a debtor lodges a petition in Sydney and the petition is accepted, the place of origin for the administration of the bankruptcy is the Bankruptcy District of the State of New South Wales. Official Receivers will be able to delegate their powers to each other in respect to a particularly bankruptcy where, say, circumstances change and for practical purposes it is more convenient to attend to a matter in another Bankruptcy District.

Item 43 provides authority for the Inspector-General in Bankruptcy to have general administration of the Bankruptcy Act 1966 combined with a general power of delegation to an officer of the Department.

Item 57 repeals the power of the Governor-General to declare Bankruptcy Districts and replaces that with a power for the Inspector General in Bankruptcy to perform that function. The purpose of the amendment is to provide administrative simplicity.

Item 59 provides an amendment to existing section 15 of the Bankruptcy Act 1966 to expressly make generally reviewable, by the Court, an Act done by an Official Receiver e.g. rejecting a debtor's petition for bankruptcy. Previously, actions done by an Official Receiver were reviewable only in specified circumstances.

Item 74 is a re-statement of the duties of trustees with the addition of some more contemporary duties such as the need to report to creditors within 3 months of the bankruptcy on the likelihood of the creditors receiving a dividend. In addition, a trustee will be under a duty to investigate and take steps to recover any property which the trustee can show was transferred by the now bankrupt and that transfer is void against the trustee. A trustee will also be under an express duty to administer a bankrupt estate efficiently and with a regard to commercially sound practices. These proposed amendments appear timely.

Item 89 contains proposed amendments which confine the jurisdiction in bankruptcy matters to the Federal Court (and, of course, the High Court). Technically, State Courts will still be able to deal with bankruptcy matters under the Commonwealth's cross-vesting legislation but, in practice, very few matters are now initiated in a State Court. In 1994, only one matter was known to have been initiated in a State court.

Item 103 contains a proposed amendment which has the effect of recognising that the act of bankruptcy (in the administrative sense) commences with the filing of documentation with the Official Receiver, in lieu of the Registrar in Bankruptcy in the Federal Court. Item 105 supplements the circumstances which constitute acts of bankruptcy to include recognition of the proposed new provisions dealing with a debt agreement proposal (the proposed new Part IX arrangement for minor debtors).

Bankruptcy should not be used to enforce recovery of trivial debts. Under the existing law, the debtor's liability must be at least $1,500. Items 114 and 123 lift that threshold figure to $2,000.

Item 155 repeals and replaces provisions dealing with the presentation of a debtor's petition against a partnership. The existing provisions have been rewritten mainly to recognise that the power to deal with petitions will reside with the Official Trustee in lieu of the Registrar of the Court. Likewise, Item 158 proposes similar amendments for joint debtors who are not partners.

Item 177 proposes an expansion of the powers of the Official Receiver when gaining access to premises and books for the purposes of the Bankruptcy Act 1966. The Official Receiver will be able to remove books in lieu of just copying pages or making an extract. Item 178 will allow the Official Receiver or an authorised officer to authorise, in turn, the attendance of a registered trustee (and accompanying person nominated by the registered trustee) to assist in the identification of relevant documentation. Previously, a registered trustee was confined to an attempt at identifying the documents to the Official Receiver whose task it was to then access the premises and examine the books.

Item 203 provides a table to assist in determining the date on which bankruptcy commenced. Under the present law, it is technically possible for a debtor, in certain circumstances, to artificially reduce what otherwise would have been an earlier date for the commencement. This situation was created when a debtor who had a creditor's petition pending would subsequent petition separately as a voluntary bankrupt. Where this situation occurred it was necessary for the earlierintime creditor to apply to the Court to have the later-in-time debtor's petition annulled. The time for commencement of the bankruptcy is, in some cases, critical because it governs the period of relation back (i.e. transactions prior to the date of the petition which can be subject to a claim as void against the trustee). The proposed amendments aim to close that loophole.

Item 213 is key provision in the Bill. Under existing bankruptcy law certain property transfers occurring up to 2 or, in some other cases, up to 5 years before the commencement of bankruptcy can be challenged on the basis that the transfer was made to deprive creditors of assets that might otherwise have been included in the now bankrupt's estate.

The Bill is a direct challenge to property settlements which are undervalued or made in circumstances in which the now bankrupt was at the time of the transfer insolvent. In principle, there is little objection to the tightening of bankruptcy law so that artificial property transactions aimed at defeating creditors are rendered void as against the trustee. As noted above, there is the issue of retrospectivity in relation to those additional undervalued property settlements dating back up to 5 years before the commencement of the proposed amendments. In simple terms, the amendments will add to the range of antecedent transactions which can be challenged by the trustee in bankruptcy for the benefit of creditors and the practical affect of the amendments is retrospective.

Items 252 to 265 are the most topical amendments in the Bill. These proposed amendments are aimed at rectifying the said deficiencies in the 1992 amendments concerning income contributions from bankrupts. The Federal Court in Bond v Trustee of Property of Bond (A Bankrupt) (supra) ruled by a majority 2:1 that the 1992 amendments, in so far as they dealt with the meaning of income, were not as broad in their reach as was originally intended. This issue has been discussed above in the Background under Income Contribution from Bankrupts.

The key proposal (Item 256) is to amend the definition of 'income' in section 139L of the Bankruptcy Act 1966. The main issues arising from the proposed amendment is the addition of words which more clearly identify, as included in the concept of income, the value of a benefit that is provided in any circumstances to the bankrupt and a new category of a loan made to the bankrupt.

Hon Justice Cooper in Bond v. Trustee of Property of Bond (A Bankrupt), commented that in its existing form, the Bankruptcy Act 1966 could, on the interpretation promoted by the trustee in bankruptcy, arguably include legal aid as 'income'.(6) When the forerunner of this Bill was introduced into Parliament in 1995, the modifications to the definition of 'income' did not specifically address the problem identified by Justice Cooper. The Senate Legal and Constitutional Legislation Committee in its report, Bankruptcy Legislation Amendment Bill 1995, in September 1995, recommended that payments such as legal aid should be specifically excluded from the definition of income.(7) The Bill (now reintroduced) has adopted the Senate Committee's recommendation (see the concluding paragraphs of Item 256).

Item 288 contains proposed amendments which transfer the registration of trustees from the Registrar in Bankruptcy in the Federal Court to the Inspector-General in Bankruptcy. Under the present legislation, the suitability of an applicant is the subject of a report by the Official Receiver to the Registrar (in practice, this report is prepared by a committee which includes a representative from the private registered trustee sector). Under the proposed amendments, the suitability of the applicant will be the subject of a report from a committee convened by the Inspector-General in Bankruptcy. That committee will include a representative from the private sector. Decisions on registration may be reviewed by the Administrative Appeals Tribunal. Registration has effect for 3 years.

Item 325 contains a significant proposed addition to bankruptcy law in Australia. It is proposed that a debtor with liabilities below about $52,000 (i.e. 7 times the basic rate for a partnered pension) has the option of entering into what will be know as a Part IX - Debt Agreement. This is an arrangement short of actual bankruptcy.

[Digest Comment: The basic rate of partnered pension is indexed and it varies on a 6 monthly basis in line with CPI increases. There is a minor discrepancy in the Explanatory Memorandum to the Bill concerning the calculation in paragraph 46 and paragraph 135.12 and paragraph 135.16. The current threshold figure should be in the order $52,000. The figure varies because of 6 monthly indexation.]

In most cases, the 'minor' debtor will lodge a written proposal with the Official Trustee who will consider how the debtor proposes to deal with his or her insolvency problem. The Official Trustee in processing the proposal will either call a meeting of creditors or write to the creditors known to the Official Trustee seeking views on whether the proposal should be accepted. A special resolution by creditors is required to accept the debt agreement. The resolution must be passed by a majority of creditors representing 75% in value of the debts owed to creditors. As a safeguard, it is open to a debtor, creditor or Official Trustee to apply to the Court for an order terminating a debt agreement (see proposed new section 185Q) or declaring a debt agreement void (see proposed new section 185T).

The effect of Official Trustee's acceptance of a debt agreement proposal means that it is then listed formally on the National Personal Insolvency Index (NPII). Once listed, the debts are then frozen and there is a stay on enforcement action by creditors.

This form of debt resolution is not available to a person whose income is twice the threshold amount specified in the provisions relating to income contributions from bankrupts. In simple terms, if the minor debtor earns an annual salary of $52,000 or more, then a Part IX debt agreement is not available (see proposed new section 185E).

[Digest Note: The Explanatory Memorandum to the Bill identifies the base income threshold for income contribution from a bankrupt at $26,013.26 and calculates twice that figure as $48,812.40 - see paragraph 135.16 of the Explanatory Memorandum. This Digest assumes that the figure should be about $52,000.]

This proposed system is akin to bankruptcy in that once a debt agreement is accepted, the creditors are limited in regard to any separate legal action for recovery of the debt. A satisfactory conclusion to the agreement (e.g. paying 70 cents in the dollar to settle the debts) releases the debtor from liability for the debts. The debtor may ask the Official Trustee to issue a certificate confirming that the debtor has satisfied his or her obligations under the Debt Agreement. Decisions by the Official Trustee to accept or not accept a debt agreement proposal will be reviewable by the Administrative Appeals Tribunal.

The present bankruptcy law already includes Part X - Arrangements with Creditors Without Sequestration which is used extensively to administer the debtor's affairs without the application of the strict code (and to some extent) stigma of bankruptcy. Formal bankruptcy also imposes a number of personal inconveniences on a bankrupt (e.g. the need to disclose the existence of the bankruptcy when seeking credit). The proposed Part IX - Debt Agreement system will provide a simplified form of administration of minor debtors similar to the existing Part X system. For example, a Part X arrangement can only be commenced by the debtor giving a written authority to a registered trustee or a solicitor. Essentially, the debtor's property then falls under the control of the registered trustee. The simplified approach under proposed Part IX will create an arrangement where it may not be necessary to have a trustee at all e.g. the debt agreement is sufficient in itself to satisfy the control of the funds or assets necessary to reduce the minor debt (Part IX only applies to debts below $52,000).

[Digest Note: On balance, a simplified administrative process for minor debtors is commendable.

An issue which requires noting is the Dissenting Report by Senators Abetz, Ellison and O'Chee to the report of the Senate Legal and Constitutional Legislation Committee (Bankruptcy Legislation Amendment Bill 1995 - September 1995). The Senators, dissented over the informality of the Part IX - debt agreement scheme. Essentially, the scheme will operate in the absence of an appointed trustee in bankruptcy. The Senators observed that there was scope for insufficient formal control over the property and financial affairs of the debtor. It was suggested by the Senators that this can give rise to disputes which are not in the interests of the creditors or the debtor. The appointment of a trustee increases the cost of the scheme. The Senators acknowledged that the aim of the proposed new scheme was to create a low cost alternative to bankruptcy for minor debtors(8)

On 28 June 1996, Senator O'Chee informed the Senate that the Selection of Bills Committee had resolved to refer this Bill to the Senate Legal and Constitutional Legislation Committee to look at the new amendments in terms of the Government's response to the September 1995 report of the Committee. The proposed reporting date is on or before 22 August 1996.(9)]

Item 326 commences a proposed set of amendments to revise the existing provisions of Part X - Arrangements with Creditors Without Sequestration. As noted above, this Part of the Bankruptcy Act 1966 provides a system for a debtor to make arrangements with his or her creditors one step short of actual bankruptcy. A Part X arrangement has more formalities than the proposed new Part IX debt arrangement which is confined to low income minor debtors. The proposed amendments to existing Part X are an attempt to streamline the provisions and to introduce overdue measures e.g. the period of control (supervision of the debtor's property by a registered trustee) under which the debtor must operate will come to an end by operation of law. At present, the control period can continue indefinitely if creditors do not agree to the Part X proposal. These amendments appear to be practical.

[Digest Note: There remains what is probably a minor but unresolved concern as to whether the concentration of certain functions within an administrative system dealing with bankruptcy and personal insolvency is constitutional. In evidence to the Senate Legal and Constitutional Legislation Committee, Mr Anthony Morris QC, queried whether the effect of proposed new section 204A (Item 356) infringed Chapter III of the Constitution. Basically, the concern is that the legal effect of the creditors' special resolution under the proposed revisions to Part X can be to render a debtor bankrupt, a function which should be reserved to a Court. In other words, it is not up to a meeting of creditors (a non-judicial body), in essence, to declare a person to be bankrupt. The Senate Committee noted the issue raised by Mr Morris QC and suggested that it warranted further consideration including specific advice on this matter be from the Office of General Counsel within the Attorney-General's Department.(10) The issue does not appear to be canvassed in the revised Explanatory Memorandum to the Bill but may have been the subject of a supplementary departmental submission to the Senate Committee. It is possible that this issue will be clarified in the current examination of the new Bill by the Committee.]

Item 394 commences a series of proposed amendments to Part XI - Administration of Estates of Deceased Persons in Bankruptcy in the existing Bankruptcy Act 1966. The proposed amendments are minor and include consequential amendments arising from modifications to other provisions in the Bankruptcy Act 1966 included in this Bill (e.g. reference to the proposed new section 204A, discussed above).

Items 411 to 414 contain proposed amendments to Part XIA - Farmers' Debts Assistance in the Bankruptcy Act 1966. This part of the Act deals with the interaction of Commonwealth, State and Territory laws dealing with farmers' debt adjustments, rural reconstruction grants and rural adjustment grants. Under the existing Act, the relevant authorities responsible for these schemes interacted with the Registrar of the Court in matters where there is a stay on proceedings concerning farm debts. The proposed amendments in the Bill implement the shift in bankruptcy administration functions from the Registrar of the Court to the Official Receiver.

Item 418 contains a proposed amendment to Part XII - Unclaimed Dividends or Money in the Bankruptcy Act 1966. The proposed amendment is to section 254(4) of the Bankruptcy Act 1966 and its effect is to remove from the Minister the authority to pay to a claimant an entitlement specified in an order of the Court as moneys due to the person. These situations arise when the Official Receiver of a trustee in bankruptcy has been unable, at the time of the administration of a bankrupt estate, to trace a person to whom money is owed. The money is then paid into the Consolidated Revenue Fund. Subsequently, the person may come forward as a claimant and lodge documentation with the Court for recognition and payment of their entitlement. The justification for the proposed amendment is that the Minister already delegates that function to the Official Receiver and the proposed amendment removes the need for the renewal of the delegation (see paragraph 181.2 of the Explanatory Memorandum to the Bill). This proposed amendment further concentrates the administration of bankruptcy in the Official Receiver.

Item 427 proposes the repeal of existing section 263C of the Bankruptcy Act 1966 and its replacement with a new provision. The existing section 263C makes it an offence for a person (creditor) to give a false or misleading statement to the Chairperson of a meeting of creditors. The existing penalty is $1,000 or imprisonment for 6 months, or both. The proposed new section 263C modifies the provision to make the offence applicable when a false or misleading statement is given in a creditor's statement (section 64D) to a trustee in bankruptcy. The penalty is simply stated as imprisonment for 6 months.

Item 451 contains a proposed revision of the Governor-General's Regulation-making powers to add a specific reference to allow the prescription, by Regulation, of the National Personal Insolvency Index (NPII). In practical terms, this is simply a formalisation by subordinate legislation of what has been an administrative process of keeping an index of the names and financial details of persons who have become bankrupt. This index is available for public inspection. The information is now stored on a database called the Bankruptcy Index Online System (BIOS). The key issue is that the coverage of the Index by Regulations will mean that the record keeping practices will be subject to scrutiny by Parliament via its examination of subordinate legislation. The proposed amendments appear sensible and practical.

Items 453 to 514 are transitional provisions arising from the significant amendments proposed by this Bill.

Schedule 2 to the Bill

This Schedule simply deals with proposed amendments which are aimed at making the Bankruptcy Act 1966 gender neutral.

Recommended Reading

The Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 1996 is highly recommended. It is an exceptional piece of work which contains a useful section on Policy Objectives (pp. 4-31 of the Explanatory Memorandum to the Bill).

Rose, D. Lewis: Australian Bankruptcy Law, 10th Edition, The Law Book Company Limited, Sydney, 1994.

Endnotes

1. In 1702, a modification was permitted to allow debtors to be discharged from prison if they enlisted in the Army or Navy. In 1813, the Insolvency Act was passed in England to give relief against imprisonment after being in custody for 3 months. See Rose, D. Lewis: Australian Bankruptcy Law, 10 Edition, The Law Book Company, Sydney, 1994: 9.

2. Explanatory Memorandum to the Bankruptcy Legislation Amendment Bill 1996: 6.

3. ibid: 7.

4. (1994) 125 ALR 399

5. Bailey, B. Income Contribution from Bankrupts: A Recent Federal Court Decision, Parliamentary Research Service, Current Issues Brief No. 25 of 1994.

6. (1994) 125 ALR 399, 419-420.

7. Australia, Senate Legal and Constitutional Legislation Committee, Bankruptcy Legislation Amendment Bill 1995, September 1995: 58-60.

8. ibid: 67-68

9. Australia, Senate, Hansard, 28 June 1996: 2549.

10. op cit: 34-36

Contact Officer and Copyright Details

Brendan Bailey Ph. 06 277 2434
19 July 1996
Bills Digest Service
Parliamentary Research Service

This Digest does not have any official legal status. Other sources should be consulted to determine whether the Bill has been enacted and, if so, whether the subsequent Act reflects further amendments.

PRS staff are available to discuss the paper's contents with Senators and Members and their staff but not with members of the public.

ISSN 1323-9032
© Commonwealth of Australia 1996

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Published by the Department of the Parliamentary Library, 1996.

This page was prepared by the Parliamentary Library, Commonwealth of Australia
Last updated: 12 July 1996

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