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
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
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.
[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.
[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.
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
Brendan Bailey Ph. 06 277 2434
19 July 1996
Bills Digest Service
Parliamentary Research Service
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sources should be consulted to determine whether the Bill has been
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amendments.
PRS staff are available to discuss the paper's contents
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the public.
ISSN 1323-9032
© Commonwealth of Australia 1996
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