BILLS DIGEST NO. 88, 2017–18              19 March 2018

Bankruptcy Amendment (Debt Agreement Reform) Bill 2018

Liz Wakerly
Economics Section

Paula Pyburne
Law and Bills Digest Section

Date introduced:  19 February 2018

House:  House of Representatives

Portfolio:  Attorney-General

Commencement: Various dates as set out in the body of this Bills Digest.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at March 2018.

The Bills Digest at a glance

Purpose of the Bill

The Bill amends the Bankruptcy Act 1966 to effect a comprehensive reform of Australia’s debt agreement system in the following manner:

•       Schedule 1 – Debt agreement proposals modifies the requirements for and treatment of, debt agreement proposals

•       Schedule 2 – Debt agreements sets standards for the operation of debt agreements

•       Schedule 3 – Registered debt agreement administrators modifies the standards that registered administrators must satisfy

•       Schedule 4 – Registered trustees contains technical amendments and

•       Schedule 5 – Unclaimed money modifies the requirements for registered personal insolvency practitioners to pay unclaimed moneys to the Commonwealth.

Background

Debt agreements were introduced in 1996 as a form of insolvency administration outside bankruptcy for persons with low levels of debt, few assets and low incomes. In 2016–17, debt agreements accounted for more than 45 per cent of all personal insolvencies. Commentators have expressed concerns that debt agreements may be causing harm, particularly to those vulnerable debtors on low incomes for whom they were originally intended. Key concerns relate to the use of inappropriate sales techniques by debt agreement administrators, inadequate understanding by firms of the relevant law and risks of particular strategies, opaque and often high administrator fees and costs, and inflexible repayment plans.

Key issues and provisions

The Bill:

•       sets stricter practice standards for debt agreement administrators (including compulsory registration), tougher penalties for wrongdoing and grants the Inspector-General additional investigative powers to address misconduct

•       requires debt agreement administrators to: hold and maintain professional indemnity and fidelity insurance as a requirement of registration; and to be fit and proper persons

•       clarifies the types of expenses that debt agreement administrators can recover

•       links debt agreement repayments to a specified percentage of income, with the percentage determined by legislative instrument

•       limits the length of a debt agreement proposal to three years (in line with bankruptcy provisions)

•       doubles the current asset eligibility threshold to be eligible to propose a debt agreement

•       provides the Official Receiver with the ability to reject proposed debt agreements that would cause undue financial hardship to the debtor

•       reduces the potential for conflicts of interest in the proposal, variation and termination of debt agreements, and aligning offences with those applicable to bankruptcy trustees and

•       extends the possibility of voiding a debt agreement to the situation where a debt agreement administrator has breached conditions or duties.

Purpose of the Bill

The purpose of the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018 (the Bill) is to amend the Bankruptcy Act 1966 (the Bankruptcy Act) to effect a comprehensive reform of Australia’s debt agreement system. Significant measures in the Bill make provision for:

•       the types of practitioners authorised to be debt agreement administrators

•       registration, deregistration and obligations of debt agreement administrators

•       formation, administration, variation and termination of debt agreements

•       protections against debt agreements that cause financial hardship or have other defects and

•       powers of the Inspector-General in Bankruptcy (the Inspector-General) with respect to debt agreements and debt agreement administrators.

Structure of the Bill

The Bill comprises five Schedules:

•       Schedule 1 – Debt agreement proposals modifies the requirements for and treatment of, debt agreement proposals. Amendments include:

–      limiting the types of practitioners authorised to be debt management agreement administrators

–      the types of information the debtor must record in a debt agreement proposal

–      the certifications the proposed administrator must make

–      the standards for how the Official Receiver must handle proposals

•       Schedule 2 – Debt agreements sets standards for the operation of debt agreements covering:

–      the length of debt agreements

–      mechanisms for varying, terminating and voiding debt agreements

–      an administrator’s duties in the administration of debt agreements

•       Schedule 3 – Registered debt agreement administrators modifies the standards that registered debt agreement administrators must satisfy, including:

–      prerequisites and conditions for registration

–      ongoing obligations

–      grounds for deregistration

–      trust accounts

–      functions of the Inspector-General

•       Schedule 4 – Registered trustees contains technical amendments

•       Schedule 5 – Unclaimed money modifies the requirements for registered personal insolvency practitioners to pay unclaimed moneys to the Commonwealth, and the process to apply for unclaimed moneys.

Background

Personal insolvency

The Australian Financial Security Authority (AFSA), which is an executive agency in the Attorney-General’s portfolio, manages the application of bankruptcy and personal property securities law through the delivery of personal insolvency and trustee, regulation and enforcement and personal property securities services.[1]

Under the Bankruptcy Act, there are four options for individuals facing unmanageable debt:

•       a declaration of intention (DOI) to present a debtor’s petition which provides temporary relief while being pursued by creditors (Division 2A in Part IV of the Bankruptcy Act)

•       bankruptcy which includes a debtor’s petition (voluntary bankruptcy) (Division 3 in Part IV of the Bankruptcy Act) and a creditor’s petition (Division 2 in Part IV of the Bankruptcy Act)

•       personal insolvency agreements (Part X of the Bankruptcy Act) and

•       debt agreements (Part IX of the Bankruptcy Act).[2]

Appendix 1 to this Bills Digest contains a chart illustrating the number of new administrations of personal bankruptcies, debt agreements and personal insolvency agreements in Australia for the period 1986–87 to 2016–17. Debt agreements have become increasingly popular: in 2016–17, debt agreements accounted for more than 45 per cent of all personal insolvencies, up from less than two per cent in 1997–98.

The AFSA website provides comparison tables for the three agreement options, looking at eligibility, income payments, restrictions on employment, the treatment of assets and the nature of debts, personal restrictions, and fees and charges. These tables are shown in Appendix 2 to this Bills Digest.[3]

Operation of the Bankruptcy Act

Declaration of intention

A DOI provides a 21-day protection period where unsecured creditors cannot take further action to recover debts.[4] Details of the DOI do not appear on the National Personal Insolvency Index (NPII). A DOI does not automatically make a debtor bankrupt, but creditors can use the fact that a DOI has been lodged to apply to the court to make a debtor bankrupt.[5]

Bankruptcy

Bankruptcy brings a definite end to debt problems, with creditors dealing exclusively with the bankruptcy trustee.[6] A bankrupt must provide details of debts, income and assets to the trustee who can sell certain assets to help pay debts. If a bankrupt’s income exceeds a set amount, the bankrupt may need to make compulsory payments to the trustee. A bankruptcy may impose restrictions on employment and overseas travel, may affect a bankrupt’s ability to obtain future credit and appears permanently on the NPII.[7]

Currently, a bankrupt will automatically be discharged from bankruptcy if three years and one day have passed since a statement of affairs was filed.[8]

Personal insolvency agreement

A personal insolvency agreement (PIA), also known as a Part X, is a legally binding agreement between a debtor and his or her creditors. The PIA involves the appointment of a trustee to take control of property and make an offer to creditors. The offer may be to pay all or part of debts by instalments or a lump sum. There are no debt, asset or income limits to be eligible for a PIA and the length of the PIA will depend upon negotiations with the trustee and creditors. Fees apply to propose, lodge and manage a PIA.[9]

A PIA is an act of bankruptcy with debtor details appearing on the NPII permanently. Debtor details will appear on a credit file for up to five years (or longer) and consent of the controlling trustee is required before dealing with property. Under a PIA, a debtor cannot manage a corporation until the terms of the agreement have been finalised.

Debt agreements

A debt agreement is a legally ‘binding agreement between an insolvent debtor and his or her creditors under which the creditors agree to accept a sum of money the debtor can afford to pay’.[10] Debt agreements were introduced into Australian law in 1996, and were intended to offer a more flexible, less onerous and socially stigmatising alternative to bankruptcy.[11]

A debt agreement begins with a proposal, put by the debtor to his or her creditors. This proposal must satisfy specific conditions set out in Part IX of the Bankruptcy Act, and must be lodged with AFSA using prescribed forms.[12] To be eligible to propose a debt agreement, unsecured debts and assets must be less than $111,675.20, and annual after-tax income must be less than $83,756.40.[13]

A debt agreement requires a debtor to negotiate a percentage of the combined debt that can be repaid over a period of time (usually between three and five years); repayments are made to a debt agreement administrator; and once payments are complete and the agreement ends, creditors cannot recover any outstanding monies owed.[14]

Debt agreements are subject to the oversight of the Official Receiver, AFSA. If the Official Receiver is satisfied that the debt agreement proposal is in accordance with regulatory requirements and eligibility criteria have been met, the proposal is distributed to creditors. The proposal becomes a binding agreement if enough creditors vote to accept it.[15]

Fees are charged for lodging a debt agreement proposal with AFSA and for proposing and managing a debt agreement.[16] Debt agreements cover most unsecured debts, or a debt not tied to specific property.[17]

Proposing a debt agreement is an act of bankruptcy. The key difference between bankruptcy and a debt agreement is that a debtor with significant assets will lose those assets under bankruptcy but can retain them with a debt agreement.[18]

The amount of time a debt agreement appears on the NPII varies with the type of agreement and how it ends (ranging from one year to five years from the date the debt agreement was made or the date the obligations are complete, whichever is longer).[19]

If a debtor is unable to make payments as agreed, he or she may seek to vary the terms of the debt agreement by lodging a proposal with the Official Receiver.[20] Any variation is subject to the consent of a majority of creditors. Debt agreements may be terminated if the debtor defaults on payments for six months or more, or becomes bankrupt; by an order of the Court; or where a proposal to terminate the agreement is accepted by a majority in value of creditors.[21]

Concerns with the debt agreement framework

Commentators have expressed concern that debt agreements may be causing harm, particularly to vulnerable debtors on low incomes.[22]

There is no uniform regulatory framework applying to the activities of debt management firms in Australia. Firms are not required to hold a credit licence or an Australian Financial Services Licence to provide debt management services.[23]

Not all debt agreement administrators are registered. A debt agreement administrator is only required to be formally registered if: the debt agreement administrator intends to lodge new debt agreement proposals after 1 July 2007; and if the debt agreement administrator is already administering more than five active agreements.[24]

Inspector-General Practice Statement 2 outlines the requirements on a debt agreement administrator to become registered.[25] Currently, this includes passing a basic eligibility test and an examination of their capability to perform the duties. As at 30 June 2017, there were 78 registered debt agreement administrators.[26]

Critics argue that some debt agreement administrators fail to inform debtors of the full implications of signing a debt agreement, maintaining that many debtors would be better off attempting to negotiate repayment arrangements or debt waivers through financial hardship schemes or external dispute resolution.[27] For many low-income debtors, debt agreements prolong financial hardship; bankruptcy would offer immediate relief.

The Inspector-General in Bankruptcy, AFSA’s Chief Executive, has powers to regulate bankruptcy trustees and debt agreement administrators (registered and unregistered), review decisions of trustees and investigate allegations of offences under the Bankruptcy Act.[28] Eight registered debt agreement administrators were inspected in 2016–17, along with 49 of their administrations. Sixteen errors were identified, of which seven concerned ‘failure to comply with certification duties’.[29]

It has been argued that some administrators encourage low-income debtors to enter into agreements that are unsustainable.[30] In 2015, a group of researchers at the Melbourne Law School undertook a national online survey of financial counsellors, consumer solicitors and other advocates who specialise in helping financially distressed individuals.[31] The survey found that many of these advocates were ‘highly sceptical about the value of debt agreements’. In particular, several advocates reported that debt agreements often require clients to make regular repayments that they cannot afford resulting in ‘continual hardship’. Some debt agreement administrators were found to adopt inappropriate sales techniques, including failing to disclose all relevant information to potential clients.[32]

When the debt agreement framework was established, it was not expected that private, profit-making institutions would assume a prominent role. In particular, it was ‘not proposed that there would be any fees or administrative charges associated with debt agreements’.[33] Critics of the current system maintain that high administrator fees result in lower returns for creditors. In its online survey, Melbourne Law School researchers reported criticism of the high administrative costs built into debt agreements (in some cases greater than the original debt) and the inflexibility of the repayment plans.[34]

Committee consideration

Senate Legal and Constitutional Affairs Committee

The Bill has been referred to the Senate Legal and Constitutional Affairs Legislation Committee (the Committee) for inquiry and report by 19 March 2018. Details of the inquiry are available here. The Bill was referred to provide relevant stakeholders with the opportunity to provide feedback and to allow for consideration of expert views on potential impacts.

Senate Standing Committee for the Scrutiny of Bills

At the time of writing this Bills Digest, the Senate Standing Committee for the Scrutiny of Bills had not commented on the Bill.

Policy position of non-government parties/independents

Speaking in relation to the Bill, the Shadow Attorney-General, Mark Dreyfus, stated that the Australian Labor Party would support the Bill, ‘subject to any necessary amendments arising as recommendations from the ongoing Senate inquiry’—in particular with reference to the three-year time limit for debt agreement repayments.[35] Mr Dreyfus expressed concern that the percentage cap on a debtor’s after-tax income that can be repaid in the repayment schedule is subject to Ministerial discretion, preferring this percentage be given a statutory footing.[36]

Position of major interest groups

Treasury consultation

The improvement of the bankruptcy and insolvency regimes is part of the Government’s National Innovation and Science Agenda which was announced by the Prime Minister, Mr Turnbull on 7 December 2015.[37] In conjunction with that announcement, Treasury circulated a consultation paper entitled National Innovation and Science Agenda – Improving bankruptcy and insolvency laws, and sought public comment about ways in which to improve the relevant laws. In their submissions to the Treasury, Financial Counselling Australia (FCA), the Financial Rights Legal Centre and the Consumer Action Law Centre all advocated for a full review of debt agreements.[38] The Financial Rights Legal Centre argued that consumers are frequently misled about the nature and consequences of debt agreements: ‘advantages are consistently oversold and the disadvantages downplayed’.[39] Common misperceptions about debt agreements include:

•       it is a debt consolidation rather than an insolvency option

•       there will be no effect on the ability to obtain credit

•       there will be no effect on the debtor’s trade licence or ability to continue in their profession

•       there are no other options available to deal with financial difficulty and

•       payments made up from for the preparation of the debt agreement will ultimately be set off against the debts (the payment is for the preparation of the debt agreement and is not set off against anything. It is rarely refunded if the debt agreement is rejected and many clients put themselves into default on their credit obligations in order to make these payments).[40]

The Financial Rights Legal Centre recommended:

•       debt agreements be limited to potential debtors with a material divisible asset to protect

•       advertising is not misleading and makes it clear that debt agreements are an act of insolvency under the Bankruptcy Act, and

•       AFSA publish more comprehensive statistics on debt agreements.[41]

The Consumer Action Law Centre also proposed a minimum standard of entry for debt agreements, including an income above the income threshold in the Bankruptcy Act, and an asset that could be seized under bankruptcy.[42]

ASIC report

In a 2016 report, the Australian Securities and Investments Commission (ASIC) presented the findings of research into debt management firms in Australia.[43] Using both qualitative and quantitative techniques, the report presents some key findings:

•       a growing number of debt management firms offer a wide range of services to consumers including representing consumers at external dispute resolution (EDR)

•       fees and costs were opaque, often high and heavily ‘front loaded’

•       some sales techniques created a high pressure sales environment

•       little information was given about risks

•       some firms had a poor understanding of the relevant law and consequences of particular strategies

•       firms rarely referred consumers in financial hardship to free, alternative sources of help or advised consumers that they could resolve the problem themselves at no cost

•       most disputes brought to EDR schemes by debt management firms relate to arguments about the removal of default listings on consumer credit reports

•       while an increasing number of consumers are being represented at EDR by debt management firms, that is not leading to more credit reporting related disputes being found in favour of consumers.

Committee inquiry

In its submission to the Committee Inquiry, the Personal Insolvency Professionals Association (PIPA) argued that ‘a near perfect regime of Debt Agreement is now being amended to create unforeseen implications for debtors and the economy at large’.[44] PIPA represents Registered Debt Agreement Administrators (RDAAs) whose members are required to abide by a Code of Conduct.

PIPA argues for exempting the value of the family home from the asset eligibility threshold (Schedule 1, Part 3, item 17 of the Bill), on the grounds that, under the National Consumer Credit Protection Act 2009, if a consumer could only comply with their financial obligations by selling their principal place of residence, or the consumer could only comply with those obligations with substantial hardship (contrary to the intent in Schedule 1, Part 5, item 23 of the Bill).[45] PIPA also had some concerns about the introduction of a percentage-based payment to income ratio where the Minister has the power to determinate the percentage by legislation instrument (Schedule 1, Part 4, item 21 of the Bill);[46] and on the three-year limit to debt agreements (Schedule 2, Part 1, item 1 of the Bill).[47] These concerns largely relate to the imposition of a ‘one rule fits all’ approach which is too rigid. PIPA proposes automatic approval for debt agreements which have an assured return to creditors; and, if zero votes are received at the initial proposal, the debt agreement proposal be accepted as proposed.

On the other hand, the Australian Restructuring Insolvency and Turnaround Association (ARITA), considers that ‘the measures contained in the Bill will improve trust and confidence in the debt agreement system’.[48] ARITA raised some concerns with:

•       the proposal to double the debt agreement access threshold which applies to a debtor’s property, while leaving threshold amounts for debts and income unchanged[49]

•       capping the length of debt agreements to three years, to align with the period of income contributions in bankruptcy[50]

•       the potential outcomes with the concurrent introduction of the Bill and the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (which is proposing a reduction in the default bankruptcy period to one year).[51]

The Australian Banker’s Association (ABA) does not support the proposed reduction in the maximum term of a debt agreement, arguing that, with more stringent requirements, longer term plans could be more successful.[52] The additional requirements include a review of AFSA’s framework for debt agreement proposal assessments, the establishment of an independent complaint and dispute resolution mechanism for debtors, a re-examination of the impacts of doubling the assets threshold for debtors combined with an ‘unseen regulatory calibration methodology’, and a request to deal with ‘step ups’ whereby debtor payments increase in the final two years of an agreement.[53]

The Institute of Public Accountants (IPA) noted that the overall benefits of the proposed amendments to the debt agreement legislation may be ‘substantially affected’ if the proposed one-year bankruptcy term is introduced.[54] In particular:

•       given a choice between a debt agreement and bankruptcy, a debtor is more likely to choose the administration with the shortest timeframe to completion[55] and

•       if fewer debt agreements are entered into, the overall return to creditors may fall (as the number of bankruptcies increase).[56]

In his submission, Professor Christopher Symes, a bankruptcy law academic, expressed support for the Bill, and in particular, for the three-year maximum term for debt agreements.[57] He suggested publication of criteria to establish ‘fit and proper person’ in the assessment of debt agreement administrators.[58]

Financial implications

The Explanatory Memorandum states that the Bill will have no direct financial impact.[59]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[60]

Parliamentary Joint Committee on Human Rights

At the time of writing this Bills Digest, the Parliamentary Joint Committee on Human Rights had not commented on the Bill.

Key issues and provisions

This section examines the key provisions in Schedules 1 to 3, which contain the main amendments relating to debt agreements. Schedule 4 (which contains technical amendments) and Schedule 5 (which is concerned with unclaimed money procedures) are addressed in the following section.

Schedule 1–Debt agreement proposals

Part 1–Persons who may be authorised to deal with debtor’s property

The amendments in Schedule 1 to the Bill modify the requirements for, and treatment of, debt agreement proposals.

Currently subsection 185C(1) of the Bankruptcy Act provides that a debtor who is insolvent may give the Official Receiver a written proposal for a debt agreement. Subsection 185C(2) specifies the matters which must be included in the debt agreement proposal. Items 1 and 2 amend subsection 185C(2) of the Bankruptcy Act so that only a registered debt agreement administrator, registered trustee or the Official Trustee can be authorised to administer a debt agreement. Currently, a registered trustee, the Official Trustee or ‘other person’ can administer a debt agreement, where ‘other person’ must pass a basic eligibility test (subsection 185E(2A) and cannot administer more than five debt agreements at a time (subsection 185E(2B). Item 3 of Part 1 in Schedule 1 to the Bill makes consequential amendments to section 185E of the Bankruptcy Act to repeal these requirements.

Commencement and application

Items 1–3 of Part 1 of Schedule 1 to the Bill commence six months after Royal Assent.

The amendments will apply to debt agreement proposals given to the Official Receiver on or after commencement.[61]

Item 5 is a transitional provision which allows the Official Trustee to replace an unregistered administrator, 12 months after Royal Assent. This gives an unregistered administrator an opportunity to register as a debt agreement administrator or trustee if they wish to keep administering the debt agreement(s) they are currently administering. If the Official Trustee replaces an unregistered administrator and the replacement results in an acquisition of property from the administrator otherwise than on just terms, the Commonwealth is liable to pay compensation to the administrator.

Items 6–11 of Part 1 in Schedule 1 to the Bill are minor consequential amendments which commence 12 months after Royal Assent.

Part 2—Reimbursement of expenses

According to the Explanatory Memorandum to the Bill:

Currently it is not clear what debt agreement administrators can claim as expenses, how they may recover the expenses, and who bears the cost of the expenses. Most debt agreement administrators recover expenses directly from the funds held in trust for the administration of the debt agreement. Debt agreement administrators take expenses in priority to creditors which are party to the debt agreement, which reduces the creditors’ expected return.[62]

Subsection 185C(3) of the Bankruptcy Act allows a debt agreement proposal to provide for the remuneration of a debt administrator—other than the Official Trustee. Subsection 185C(3A) provides that the debt proposal agreement must specify the total remuneration of the debt administrator, worked out as a percentage of the total amount payable by the debtor.

Item 13 of Part 2 in Schedule 1 to the Bill provides that a debt agreement proposal must detail the types of expenses the debt agreement administrator can recover.[63] Items 14 and 15 provide that the debt agreement administrator has a duty to not reimburse themselves for expenses that were not specified in the new subsection.[64]

Commencement and application

The amendments in item 13 will apply to debt agreement proposals given to the Official Receiver six months after Royal Assent (item 16). Items 14 and 15 will apply to debt agreements that come into force on or after commencement of item 16.

Part 3—Value of debtor’s property

Currently, a debtor is prevented from giving the Official Receiver a debt agreement proposal if, at the proposal time, the value of their property that would be divisible among creditors if the debtor were bankrupt (the assets threshold) is more than the threshold amount.[65] As of 31 January 2018, this amount was $111,675.20.[66]

Item 17 amends subsection 185C(4) so that a debtor cannot give the Official Receiver a debt agreement proposal if, amongst other things, the value of the debtor’s divisible property is double the threshold amount. According to the Explanatory Memorandum, ‘recent rises in Australian property prices means that the current threshold amount prevents a significant proportion of Australians from accessing the debt agreement system’.[67]

Commencement and application

The higher assets eligibility threshold will apply to debt agreement proposals given to the Official Receiver six months after Royal Assent (item 18).

Part 4—Payment to income ratio

Currently there is no specific restriction on the size or frequency of a debtor’s proposed payments under a debt agreement. Rather the Bankruptcy Act requires that a debt agreement proposal given to the Official Receiver must be accompanied by a certificate, signed by the debt agreement administrator  that he, or she, has reasonable grounds to believe that the debtor is likely to be able to discharge the obligations created by the agreement as and when they fall due.[68] This does not always prevent debt agreements that could cause a debtor undue financial hardship.

Item 20 amends the Bankruptcy Act to insert another circumstance in which a debtor cannot give the Official Receiver a debt agreement proposal, being if the total payments under the agreement exceed the debtor’s income by a certain percentage.[69] Item 21 provides that the Minister can determine this percentage by legislative instrument.[70]

The Minister cannot delegate this legislative instrument making power (item 19).

Commencement and application

These provisions will apply to debt agreement proposals given to the Official Receiver six months after Royal Assent (item 22).

Part 5—Undue hardship to debtor

Item 23 provides that the Official Receiver can refuse to accept a debt agreement proposal for processing if the Official Receiver reasonably believes that complying with the debt agreement would cause undue hardship to the debtor.[71] The Bankruptcy Act does not define hardship or undue hardship. Instead, it is up to the Court or the Official Trustee to determine on a case by case basis.[72]

Commencement and application

This amendment will apply to debt agreement proposals given to the Official Receiver six months after Royal Assent (item 24).

Part 6—Other matters

Item 25 inserts a new definition into section 185 for a proposed administrator, in relation to a debt agreement proposal.[73]

Opaqueness of a proposed administrator’s relationships can be problematic if an affected creditor under the proposed debt agreement is a related entity of the proposed administrator.[74]

Section 5 of the Bankruptcy Act defines the term related entity, in relation to a person, as any of the following:

(a)   a relative of the person

(b)   a body corporate of which the person, or a relative of the person, is a director

(c)    a body corporate that is related to the body corporate referred to in paragraph (b)

(d)   a director, or a relative of a director, of a body corporate referred to in paragraph (b) or (c)

(e)   a beneficiary under a trust of which the person, or a relative of the person, is a trustee

(f)     a relative of such a beneficiary

(g)   a relative of the spouse, or de facto partner, of such a beneficiary

(h)   a trustee of a trust under which the person, or a relative of the person, is a beneficiary

(i)     a member of a partnership of which the person, or a relative of the person, is a member.

Item 33 of Part 6 in Schedule 1 to the Bill amends the Bankruptcy Act to require the proposed administrator to record details of any broker or referrer information and to declare whether an affected creditor is also a related entity.[75] The Official Receiver will be required to send this information to affected creditors (item 38), permitting them to review an administrator’s relationships and help to ensure that the voting process (on whether to accept a debt agreement proposal) is ‘fair and transparent’.[76]

To avoid potential conflicts of interest, item 39 of Part 6 in Schedule 1 to the Bill provides that the Official Receiver should not request a vote from a proposed administrator that is an affected creditor or from a related entity to the proposed administrator.[77]

To ensure that the results of a vote are not impacted by potential conflicts of interest, item 40 amends the acceptance rule to require the Official Receiver to disregard any votes received from the proposed administrator or related entity of the proposed administrator.[78]

The conflict of interest concerns underlying amendments in items 39 and 40 do not apply where a debtor proposes to self-administer their own debt agreement and an affected creditor is a related entity.

Item 41 creates a criminal offence where a proposed administrator gives, agrees, or offers to give an affected creditor an incentive for voting a certain way on a debt agreement proposal.[79] The maximum penalty is three months imprisonment.[80] The Explanatory Memorandum states that ‘this punishment is appropriate to deter fraudulent conduct in the financial sector which can have severe consequences for both affected creditors and debtors’.[81]

Schedule 2—Debt agreements

The amendments in Schedule 2 to the Bill set standards for the operation of debt agreements, covering their length, and arrangements for termination and voiding. The amendments also cover an administrator’s duties in their administration of debt agreements.

Part 1—Length of debt agreements

There is currently no limit on the proposed timeframe for making payments under a proposed debt agreement. Item 1 inserts proposed subsection 185C(2AA) into the Bankruptcy Act so that a debt agreement proposal must not provide that the debtor may make payments under the agreement for a period longer than three years. This three year timeframe aligns with the length of income contributions under bankruptcy. This limitation does not prevent a debt agreement from running longer than the proposed timeframe, if the obligations have not been discharged three years after the day the agreement was made.[82]

Item 2 inserts a reference to this amendment into paragraph 185E(2)(a) to ensure that the Official Receiver does not accept a debt agreement proposal for processing if it proposes to make payments under the agreement for a timeframe longer than three years.

Under subsection 185M(1) of the Bankruptcy Act, a debtor or creditor who is a party to a debt agreement may give the Official Receiver a written proposal to vary the debt agreement. Item 3 ensures debtors and creditors under existing debt agreements cannot propose a variation if the timeframe for making payments under the agreement would be longer than three years from the day the agreement was made.[83] Item 4 of Part 1 in Schedule 2 to the Bill inserts a reference to this amendment into subsection 185M(2) to ensure that the Official Receiver does not process the variation if the proposed timeframe for making payments would be longer than three years from the day the agreement was made.

Commencement and application

The amendments under items 1 and 2 apply to debt agreement proposals given to the Official Receiver on or after six months after Royal Assent. The amendments relating to debt agreement variations (under items 3 and 4) will apply in relation to debt agreements that come into force on or after six months after Royal Assent where the debt agreement proposals were given on or after that commencement.

Part 2—Proposals to vary debt agreements

The proposed amendments outlined above mean that a debtor cannot give the Official Receiver a debt agreement proposal if the total payments under the agreement exceed the debtor’s income by a certain percentage,[84] with the percentage determined by the Minister.[85] Limiting the proposed timeframe for making payments under a debt agreement to three years,[86] allows the Minister to calibrate the percentage to a three-year payment schedule.

Key issue—Sustainability

As stated above, the Bankruptcy Act requires a debt agreement proposal given to the Official Receiver to be accompanied by a certificate, signed by the debt agreement administrator that he, or she, has reasonable grounds to believe that the debtor is likely to be able to discharge the obligations created by the agreement as and when they fall due.[87] No such requirement exists in relation to a variation proposal made under section 185M of the Bankruptcy Act. Item 7 inserts proposed subsections 185M(1E) and (1F) into the Bankruptcy Act so that a certificate in equivalent terms is provided where a proposal is made to vary a debt agreement. The variation proposal is required to meet the same percentage constraint as the initial debt agreement proposal.

Item 9 inserts proposed amendments which provide:

•       the Official Receiver can refuse to accept a debt agreement variation proposal if he or she reasonably believes that complying with the debt agreement (as proposed to be varied) would cause undue hardship to the debtor[88]

•       if the Official Receiver decides not to proceed with a variation proposal (as above), he or she must give notice of the decision and the reasons for it,[89] and the debtor or affected creditors may apply to the Administrative Appeals Tribunal for a review of the decision.[90]

Key issue—Conflicts of interest

Item 10 deals with conflicts of interest that may arise if the debt agreement administrator is a creditor in a debt agreement variation proposal. It inserts amendments which relate to the procedures for dealing with proposals to vary debt agreements: the Official Receiver should not request a vote on a debt agreement variation proposal from a debt agreement administrator that is an affected creditor,[91] or, who on becoming an affected creditor, is a related entity of the administrator.[92] These restrictions do not apply if the debtor is self-administering their debt agreement.[93]

Currently section 185MC sets out the rule for acceptance of a proposal to vary a debt agreement. Item 11 inserts proposed subsections 185MC(1A) and (1B) into the Bankruptcy Act to amend the acceptance rule by requiring the Official Trustee to disregard any votes from the proposed administrator or a related entity of the proposed administrator.[94]

Key issue—Valuable consideration

Item 12 creates a criminal offence where a debt agreement administrator gives, agrees or offers to give to an affected creditor, any valuable consideration with a view to securing the affected creditor’s acceptance or non-acceptance of the proposal to vary a debt agreement.[95] The maximum penalty for contravention of this subsection is three months imprisonment, with the Explanatory Memorandum stating that ‘[t]his punishment is appropriate to deter fraudulent conduct in the financial sector which can have severe consequences for both creditors and debtors’.[96]

Commencement and application

The amendments in Part 2 of Schedule 2 to the Bill apply to debt agreements which are proposed six months after Royal Assent.

Part 3—Proposals to terminate debt agreements

Items 14 and 15 deal with conflict of interest concerns in the voting of a proposal to terminate a debt agreement.[97] The provisions mirror those in items 10 and 11 in Part 2 of Schedule 2 as discussed above.

Item 16 creates a criminal offence where a debt agreement administrator gives, agrees or offers to give to an affected creditor, any valuable consideration with a view to securing the affected creditor’s acceptance or non-acceptance of the proposal to terminate a debt agreement.[98] The maximum penalty for the offence is three months imprisonment.

Commencement and application

The amendments in Part 3 of Schedule 2 to the Bill apply to debt agreements proposed six months after Royal Assent.

Part 4—Court orders to terminate debt agreements

Currently, the Court can make an order to terminate a debt agreement in certain circumstances, including:

•       failure of a debtor to carry out the term of the agreement, or

•       if carrying out the agreement would cause injustice or undue delay to the creditors or debtor, or

•       if it is in the creditors’ interests to do so.[99]

Item 18 amends the Bankruptcy Act to expand the list of reasons for which the Court may make an order to terminate a debt agreement. The additional reasons are that the administrator has contravened any of the proposed subsections which make it an offence for the agreement administrator to give, agree or offer to give to an affected creditor, any valuable consideration (for a vote on a proposal to accept, vary or terminate a debt agreement) with a view to securing the affected creditor’s acceptance or non-acceptance of the proposal.[100]

Part 5—Voiding debt agreements

Section 185T of the Bankruptcy Act provides that a debtor, creditor or the Official Receiver may apply to the Court for an order declaring that all, or a specific part, of a debt agreement is void. This is currently limited to two circumstances:

•       if all or part of the debt agreement was not made in accordance with, or in compliance with Part IX of the Bankruptcy Act, or

•       if the statement of affairs lodged with the debt agreement omitted a material particular or was incorrect.[101]

If an application under section 185T is successful, the Court may make an order to declare a debt agreement void.[102] In that case, the Court may also make ancillary orders including an order directing a person to pay another person compensation.[103] This enables the Court to put a debtor into a similar position as they would have been had the debt agreement not been entered into.

Items 19–21 in Part 5 of Schedule 2 to the Bill amend subsection 185T(2) to extend the grounds on which an application can be made to the Court for an order declaring that a debt agreement is void to include instances where an administrator:

•       has committed a breach of duty in relation to the agreement, or

•       has breached a condition in an instrument under registration provisions either as an individual or as a company, or

•       has breached a condition imposed under registration requirements.[104]

These amendments ensure that a debtor can be put into a similar position they would have been had the debt agreement not been entered into. This includes removing the debtor’s name from the NPII, awarding damages, and declaring that the debtor has not committed an act of bankruptcy.

Commencement and application

The amendments in Part 5 of Schedule 2 to the Bill apply to debt agreements that come into force six months after Royal Assent.

Part 6—Debt agreement administrators to refer evidence of offences

Section 19 of the Bankruptcy Act, sets out the duties of the trustee of the estate of a bankrupt including, amongst other things, the duty to consider whether the bankrupt has committed any offences under the Bankruptcy Act, and if so, the duty to refer any evidence of the offence to the Inspector-General or to relevant law enforcement authorities.[105]

Item 23 amends section 185LA of the Bankruptcy Act to extend the duties of a debt agreement administrator to reflect those duties conferred on a bankruptcy trustee, which are discussed above.[106]

Commencement and application

The amendments made in Part 6 of Schedule 2 to the Bill apply in relation to debt agreements that come into force six months after Royal Assent.

Part 7—Reporting requirements for debtors in arrears

Section 185LB of the Bankruptcy Act requires the administrator of a debt agreement to notify creditors of a three-month arrears default by a debtor in certain circumstances. This obligation applies regardless of the amount in arrears.

Items 25–27 amend subsection 185LB(3) of the Bankruptcy Act to increase the threshold by which an administrator is obliged to report a three-month arrears default. The proposed amendments provide that administrators are only required to report to creditors if:

•       the value of the arrears exceeds either 20 per cent of the payment due for the period or $300, whichever is higher, or

•       the value of all due payments was $300 or less, and no payment was made in that period.[107]

Commencement and application

The amendments in Part 7 of Schedule 2 to the Bill apply in relation to debt agreements that come into force six months after Royal Assent.

Part 8—Alignment of offences

Separate bank accounts

Schedule 2 to the Bankruptcy Act is the Insolvency Practice Schedule (Bankruptcy). One of the primary objects of the Schedule is to regulate the administration of regulated debtors’ estates consistently, unless there is a clear reason to treat a matter that arises in relation to a particular kind of estate differently.[108] In particular, Division 65 of Schedule 2 deals with funds handling.

The purpose of the amendments in Part 8 of Schedule 2 to the Bill is to align the provisions relating to debt agreements with those in Schedule 2.[109] Subsection 185(LD)(1) of the Bankruptcy Act requires a debt agreement administrator who is the administrator of one or more debt agreements to pay all monies received from debtors into a single trust account in the debt agreement administrator’s own name. Item 29 inserts proposed subsection 185LD(2A) into the Bankruptcy Act to prohibit debt agreement administrators from paying any money out of that bank account, other than for purposes of administration of the debt agreement, in accordance with the Bankruptcy Act, or by direction of the Court.

Failure to comply with provisions relating to payments into and out of administration accounts gives rise to an offence of strict liability, the maximum penalty for which is 50 penalty units.[110] Item 30 inserts a new strict liability offence provision of 50 penalty units for contravention of existing subsections relating to maintenance of a separate bank account for debt agreement money and payments made to the bank account, and the proposed amendment relating to payments made out of said bank account.[111]

The Explanatory Memorandum states that ‘[s]trict liability offences are appropriate … as it is necessary to strongly deter misconduct that can have serious consequences for affected parties’.[112]

Sufficient records

Division 70 of Schedule 2 to the Bankruptcy Act provides that bankruptcy trustees and debt agreement administrators are required to keep sufficient records as are necessary to give a full and correct account of either the administration of the estate or the administration of the debt agreement, respectively, and to make such records available to the Inspector-General if so required. Failure to comply with these provisions currently attaches a strict liability offence of five penalty units for bankruptcy trustees.[113] Item 31 aligns existing section 185LE with Schedule 2 in that it creates an offence of strict liability with a maximum penalty of five penalty units for debt agreement administrators, consistent with the provision relating to bankruptcy trustees.[114]

As an alternative to prosecution, a penalty can be imposed through an infringement notice. The amount payable in respect of an infringement notice for a breach of a specific section of the Bankruptcy Act is set out in table form in subsection 277B(2). Item 32 amends the table so that a breach of the requirement to keep sufficient records and make the records available for audit can, where appropriate, be addressed by way of an infringement notice with an amount payable to the value of one penalty unit. This aligns with the penalty amounts set out for the equivalent section relating to trustees.

Commencement and application

The amendment in item 29, prohibiting money to be paid out of the trust account in certain circumstances, will apply in relation to debt agreement proposals that come into force on, after, or were in force immediately before the period six months after Royal Assent. As noted in the Explanatory Memorandum, ‘[t]he retrospective application of this duty reflects the seriousness of breaching it’.[115] Items 30, 31 and 32 will apply in relation to debt agreements that come into force on or after six months after Royal Assent.

Part 9—Time for submitting annual returns

Currently, section 185LEA provides that a debt agreement administrator must give the Inspector-General an annual return detailing information on active debt agreements managed by the administrator within 35 days after the financial year. The corresponding deadline for registered bankruptcy trustees is 25 business days.[116]

Item 34 amends section 185LEA of the Bankruptcy Act so that the applicable deadline for annual return submissions for debt agreement administrators is reduced to 25 business days after the end of the financial year.

Commencement and application

The amendment made in Part 9 of Schedule 2 to the Bill applies in relation to financial years ending six months after Royal Assent.

Schedule 3—Registered debt agreement administrators

The amendments in Schedule 3 to the Bill modify the standards that registered debt agreement administrators must satisfy.

Part 1—Applications for registration

Insurance

Registered bankruptcy trustees are required to take out professional indemnity insurance and fidelity insurance to qualify for registration.[117] There is no current similar requirement for debt agreement administrators.

Items 6–13 insert provisions that require debt agreement administrators to obtain adequate and appropriate professional indemnity and fidelity insurance, in order to have their applications for registration and renewal of registration approved by the Official Receiver.

Section 185 provides definitions for Part IX of the Bankruptcy Act. Item 1 of Part 1 in Schedule 3 to the Bill inserts proposed definitions of adequate and appropriate fidelity insurance and adequate and appropriate professional indemnity insurance into that section. Item 2 provides that the Inspector-General may determine, in a legislative instrument, what constitutes adequate and appropriate insurance.[118] This aligns with the equivalent provision for bankruptcy trustees.[119]

Interview

To become a registered bankruptcy trustee, a person must lodge an application with the Inspector-General, who will then convene a committee to consider the application. The committee must interview the applicant and decide within 45 business days after interviewing the applicant whether the applicant should be registered as a trustee or not.[120]

Item 3 amends the Bankruptcy Act to require the Inspector-General to interview applicants for debt registration ‘as soon as practicable after receiving the application’.[121] Item 4 amends the Inspector-General’s deadline for making a decision to 45 business days after the date of interview (rather than 60 days after receiving the application).[122]

These provisions are designed to align the obligations for the assessment of registrations for debt agreement administrators and bankruptcy trustees.

Evidence

Currently, subsection 186C(2) of the Bankruptcy Act sets out the matters about which the Inspector-General must be satisfied in deciding whether to approve the registration of a debt administrator. Items 5 and 6 expand the list of matters to include:

•       written evidence that the applicant has taken out adequate and appropriate professional indemnity insurance and fidelity insurance[123]

•       the applicant is a fit and proper person.[124]

These requirements align with the equivalent provisions for bankruptcy trustees.[125]

Items 8–12 contain similar provisions for registration applications by companies. Item 12 requires the company applicant to be a fit and proper person, and each director of the company to be a fit and proper person, in order for the Inspector-General to approve an application for registration as a debt agreement administrator.[126]

Registration renewal

Currently, the Inspector-General must approve an individual debt agreement administrator’s application for registration renewal.[127] The corresponding registered bankruptcy trustee renewal system imposes a restriction: a trustee’s registration must not be extended if they owe more than $500 (being the current prescribed amount) of notified estate charges.[128]

To align with the equivalent provisions for registration renewal for bankruptcy trustees, item 7 repeals and replaces subsection 186C(3) of the Bankruptcy Act to require the Inspector-General to approve an application for debt agreement administrator registration renewal if, amongst other things, there is evidence of adequate and appropriate insurance and the applicant does not owe more than the prescribed amount of notified estate charges. Proposed subsection 186C(5A) which is inserted by item 13 of Part 1 in Schedule 3 to the Bill provides that a person owes a notified estate charge if:

•       the person owes either a charge under the Bankruptcy (Estate Charges) Act 1997 or a penalty under section 281 (late payment penalty) under the Bankruptcy Act, and

•       the Inspector-General has notified the person of the unpaid estate charge at least one month and 10 business days before the person’s registration as a debt agreement administrator ceases to be in force.

Note that, unlike the requirement for bankruptcy trustee registration renewal, any amount of notified estate charges owing applies to debt agreement administrator renewals.

Commencement and application

The amendments in Part 1 of Schedule 3 to the Bill apply in relation to applications for registration and renewal of registration as a debt agreement administrator made on or after six months after Royal Assent.

Part 2—Conditions of registration

Section 105-1 of Schedule 2 to the Bankruptcy Act provides the Minister with the power to create practice standards for registered bankruptcy trustees. Currently the Minister has no power to set industry standards for registered debt agreement administrators.

Items 16–18 provide that the registration of individual and company debt agreement administrators is subject to conditions determined in a legislative instrument.[129] The Minister will be given the power to make the associated legislative instruments for the purposes of determining the conditions.[130]

Subsection 10(1) currently provides that the Minister may delegate any or all of the Minister’s powers under the Bankruptcy Act, other than the power of delegation. Item 15 amends subsection 10(1) to provide that the Minister cannot delegate the legislative instrument-making powers which are created as set out above.[131]

Existing subsection 186H(1) provides that a debt agreement administrator may apply to the Inspector-General to have any conditions on their registration changed or removed. Item 19 inserts proposed subsection 186H(1A) into the Bankruptcy Act to ensure that conditions determined in a legislative instrument (under items 16 and 17) cannot be removed upon application by a debt agreement administrator.[132]

Commencement and application

Item 20 provides that the amendments in Part 2 of Schedule 3 to the Bill apply to all registered debt agreement administrators regardless of whether they became registered before or after six months after Royal Assent.

Part 3—Ongoing obligation to maintain insurance

Item 21 inserts proposed Subdivision BA—Insurance into Division 8 of Part IX of the Bankruptcy Act. Within the new Subdivision, proposed section 186HA mandates that registered debt agreement administrators must maintain adequate and appropriate professional indemnity and fidelity insurance, and that failure to do so amounts to an offence. In the case of intentional or reckless failure, a penalty of 1,000 penalty units will apply;[133] otherwise, failure to comply is considered a strict liability offence with a penalty of 60 penalty units. Registered bankruptcy trustees are subject to similar provisions.[134]

Commencement and application

The obligation for debt agreement administrators to maintain insurance applies to registered debt agreement administrators who applied for registration on or after six months after Royal Assent (item 22).

Part 4—Cancellation of registration

Section 186K of the Bankruptcy Act sets out the circumstances in which the Inspector-General may cancel an individual’s registration as a debt agreement administrator. The equivalent provisions for company debt agreement administrators are set out in section 186L.

Items 23 and 24 amend those sections to expand the grounds under which the Inspector-General may request a written explanation from the debt agreement administrator to justify their continued registration.[135] These include:

•       a failure to have adequate and appropriate professional indemnity or fidelity insurance, or

•       the administrator (or company or director of the company) is not a fit and proper person.

These amendments will enable the Inspector-General to cancel a debt agreement administrator’s registration if:

•       the debt agreement administrator does not respond to the written request within 28 days, or

•       an explanation is received, but the Inspector-General is not satisfied with it.

Commencement and application

The obligation for debt agreement administrators to maintain insurance and be a fit and proper person applies to registered debt agreement administrators who applied for registration six months after Royal Assent (item 25).

Part 5—Trust accounts

Subsection 186LA(1) of the Bankruptcy Act sets out the conditions under which the Inspector-General may obtain information about debt agreement administration trust accounts. Currently, if the Inspector-General reasonably believes that a debt agreement administrator is misusing trust money, he or she is empowered to give notice to the bank requiring that specified information about the relevant account is provided in the manner and within the time specified in the notice. Item 26 inserts proposed subsection 186LA(1A) into the Bankruptcy Act empowering the Inspector-General to give notice to the bank to obtain information if the Inspector-General ‘reasonably suspects’ that the debt agreement administrator has:

•       contravened a provision of the Bankruptcy Act

•       failed to properly carry out the duties of an administrator in relation to the debt agreement or

•       contravened a condition of the person’s registration as a registered debt agreement administrator.[136]

Commencement and application

The amendments in this part will apply to debt agreements that come into force on or after six months after Royal Assent.

Part 6—Functions of Inspector-General

Section 12 of the Bankruptcy Act sets out the functions of the Inspector-General. The Explanatory Memorandum states that the Inspector-General’s powers to investigate and inquire into a debt administrator’s conduct, applies only once a debt agreement is made.[137] However, subsection 12(1BA) states:

[t]he Inspector-General may make an inquiry or investigation under paragraph (1)(b), (ba), (bb) or (bc) at any time, whether before or after the end of the bankruptcy, composition, scheme or agreement or administration concerned

The reference to paragraph (bb) is a reference to the conduct of an administrator of a debt agreement.

Item 28 inserts proposed paragraph 12(1)(bd) into the Bankruptcy Act to put beyond doubt that the Inspector-General’s investigation and inquiry powers extend to any conduct of a debt agreement administrator. This permits the Inspector-General to investigate or inquire into the conduct of a debt agreement administrator even if an agreement is not ultimately made, and into a debt agreement administrator’s advertising or other methods used to attract debtors.

Commencement and application

The amendments in Part 6 of Schedule 3 to the Bill provide that the Inspector-General will be able to investigate the conduct of a debt agreement administrator that has occurred on or after six months after Royal Assent, regardless of whether the administrator was registered before, on or after then.

Other provisions

Schedule 4—Registered trustees

The amendments in Schedule 4 are technical amendments. They also clarify that the Minister’s power to make rules under the Insolvency Practice Rules extends to registered trustees administering debt agreements.

Item 1 moves the Minister’s inability to delegate its power to make Insolvency Practice Rules by legislative instrument from subsection 105-1(6) in Schedule 2 of the Bankruptcy Act to subsection 10(1).

To ensure that the Insolvency Practice Rules reflect similar industry conditions for registered bankruptcy trustees administering debt agreements, item 2 clarifies that the Minister’s power to amend the Insolvency Practice Rules extends to amendments for the purposes of imposing conditions on registered bankruptcy trustees administering debt agreements.[138]

Commencement and application

The amendments contained in this schedule will apply to a person who becomes a registered trustee, or registered trustees who are registered immediately before, six months after Royal Assent.

Schedule 5—Unclaimed money

The amendments in Schedule 5 to the Bill modify the requirements for registered personal insolvency practitioners to pay unclaimed moneys to the Commonwealth, as well as the process for persons to apply for unclaimed moneys.

A bankruptcy is annulled if the trustee is satisfied that all the bankrupt’s debts have been paid in full.[139] If money is paid to the Official Receiver because the creditor cannot be found or identified, it is taken to be paid in full to the creditor. Currently, if money is paid to the Official Receiver, a person who claims to be entitled to any moneys is required to make an administrative claim to the Court.[140]

Item 1 amends subsection 153A(5) of the Bankruptcy Act to enable a person to make an administrative claim to the Official Receiver rather than the Court. The Explanatory Memorandum notes that, in many instances, the costs of seeking a court order would exceed the amount of money that is being sought. Item 4 repeals existing subsections 254(3) and (4) and inserts proposed subsections 254(3)–(9) which set out the processes for making, assessing and giving notice of the outcome of an application as well as a mechanism for review of the Official Receiver’s original determination by the Court.

If the trustee of a deceased person’s estate is satisfied that all the debts of the estate have been paid in full, the order for the administration of the estate under Part IX of the Bankruptcy Act is annulled.[141] Item 2 enables a person to make an administrative claim to the Official Receiver rather than the Court.[142]

A trustee or debt agreement administrator must pay to the Commonwealth any unclaimed dividends or moneys. The requirement for a debt agreement administrator to pay unclaimed dividends or moneys should only apply where the debt agreement administrator has identified the person entitled to the moneys.

Item 3 ensures that this requirement—to pay any unclaimed dividends or money to the Commonwealth—applies where the person entitled to the money has been identified but is unable to be located despite the debt agreement administrator making ‘all reasonable efforts’.[143]

Application and saving provisions

Item 5 provides that:

•       a person can apply to the Official Receiver for unclaimed moneys paid to the Commonwealth on or after six months after Royal Assent

•       a person can apply to the Official Receiver for unclaimed moneys paid to the Commonwealth before six months after Royal Assent, where an application had not previously been made to the Court and

•       where a person has applied to the Court for an order for moneys owing before six months after Royal Assent, the subsections as in force immediately before six months after Royal Assent shall continue to apply.

Appendix 1: Personal insolvencies, Australia

Figure 1:              Personal insolvencies, Australia 1986–87 to 2016–17

Source: AFSA, ‘Time series’, AFSA website.

Appendix 2: Formal options for insolvency

Table A1: Eligibility

Bankruptcy

Debt agreements

Personal insolvency agreements

Australian connection

Must have a residential or business connection.

No residential or business connection required.

Must have a residential or business connection.

Previous insolvency

While previous insolvency does not by itself make a person in eligible, the Official Receiver may not accept the petition if the debtor was previously bankrupt and some other conditions are met.

Must not have been a bankrupt, proposed a personal insolvency agreement or made a debt agreement in the previous 10 years.

Must not have proposed another personal insolvency agreement in the previous six months.

Income threshold

No

A person cannot propose a debt agreement if their after tax income for the year is more than $83,756.40.

No

Asset threshold

No

A person cannot propose a debt agreement if their divisible property is more than $111,675.20.

No

Debt threshold

No

A person cannot propose a debt agreement if their unsecured debts are more than $111,675.20.

No

Source: AFSA, ‘Compare the formal options’, AFSA website.

Table A2: Income, employment and trade

Bankruptcy

Debt agreements

Personal insolvency agreements

Payments from income required?

Yes, mandatory payments required if income exceeds the statutory threshold—these are on the AFSA website.

Yes, if the terms of the agreement require payments from income—this occurs in most cases.

Only if the terms of the agreement require payments from income.

Ability to continue to operate a business

It depends on the nature of the business and if the trustee sells the business assets. Key points include:

·         when a partner becomes bankrupt it dissolves an existing partnership

·         if trading under a business or assumed name after the date of bankruptcy, a bankrupt must disclose their bankruptcy to people dealing with the business. This will include bankrupts trading alone or jointly.

Yes, unless the terms of the agreement provide otherwise. If trading under a business name or assumed name (whether alone or in partnership) the debt agreement must be disclosed to all people dealing with the business.

Yes, if the agreement allows for the debtor to continue to operate the business.

Ability to be a director of, or otherwise manage, a corporation

No

Yes

Not until the terms of the agreement are fully complied with.

Other employment restrictions

Professional bodies and/or trade associations may have certain conditions of membership for the duration of the bankruptcy. There may be restrictions on holding some statutory positions during the period of bankruptcy.

Professional bodies and/or trade associations may have certain conditions of membership for the duration of the agreement. There may be restrictions on holding some statutory positions during the period of the agreement.

Professional bodies and/or trade associations may have certain conditions of membership for the duration of the agreement. There may be restrictions on holding some statutory positions during the period of the agreement.

Source: AFSA, ‘Compare the formal options’, AFSA website.

Table A3: Assets

Bankruptcy

Debt agreements

Personal insolvency agreements

Ability to retain assets

No, unless it is exempt property (for example household furniture, tools of trade up to a certain value).

Yes, unless terms of the agreement provide otherwise.

Yes, subject to the terms of the agreement.

Ability to retain assets acquired during the period of the agreement/ bankruptcy

No, unless property being acquired is exempt property.

Yes

Yes

Can assets previously sold or transferred for less than market value be recovered?

Yes, subject to certain statutory conditions being met.

No

Not unless the agreement specifies that the antecedent transaction provisions of the Bankruptcy Act apply to the debtor.

Can payments made to creditors prior to the agreement/ bankruptcy be recovered?

Yes, subject to certain statutory conditions being met.

No

Not unless the agreement specifies that the antecedent transaction provisions of the Bankruptcy Act apply to the debtor.

Source: AFSA, ‘Compare the formal options’, AFSA website.

Table A4: Debts

Bankruptcy

Debt agreements

Personal insolvency agreements

Unsecured debts

Unsecured creditors receive pro rata payment from funds recovered by the trustee after fees and costs have been deducted. There are some statutory priority payments to particular classes of creditors like employees.

All unsecured creditors receive pro rata payments.

Unsecured creditors can receive differential payment rates if the terms of the agreement provide for this. There are some statutory priority payments to particular classes of creditors like employees.

Secured debts

Rights of secured creditors are not affected. They can repossess assets if there is default in payment.

Rights of secured creditors are not affected. They can repossess assets if there is default in payment.

Rights of secured creditors are not affected. They can repossess assets if there is default in payment.

Release from debts

Upon discharge from bankruptcy, but not released from some types of debt.

Upon completing terms of agreement, but not released from some types of debt.

As per terms of the agreement, but not released from some types of debt.

AFSA, ‘Compare the formal options’, AFSA website.

Table A5: Restrictions

Bankruptcy

Debt agreements

Personal insolvency agreements

Ability to travel overseas

Prior consent of trustee required. A fee is payable where the trustee is the Official Trustee ($150).

No statutory restriction.

No statutory restriction.

Ability to travel within Australia

No statutory restriction.

No statutory restriction.

No statutory restriction.

Incurring further debt

Must disclose insolvency if incurring debt or obtaining goods and services in excess of $5,681.

Must disclose insolvency if incurring debt or obtaining goods and services in excess of $5,681.

No statutory restriction.

AFSA, ‘Compare the formal options’, AFSA website.

Table A6: Fees and charges

Bankruptcy

Debt agreements

Personal insolvency agreements

Statutory filing fee

No

Yes, $200.

Yes, $240.

Statutory levies

A government levy is imposed on all receipts in the administration. Any interest earned on these receipts is also paid to the government.

A government levy is imposed on all receipts in the administration. Any interest earned on these receipts is also paid to the government.

A government levy is imposed on all receipts in the administration. Any interest earned on these receipts is also paid to the government.

Fees for administration of the estate/s

Subject to creditor approval. Fees can be reviewed upon application to the Inspector-General.

Official Trustee’s fees are set by statute.

Subject to creditor approval.

Official Trustee’s fees are set by statute.

Subject to creditor approval. Fees can be reviewed upon application to the Inspector -General.

Official Trustee’s fees are set by statute.

AFSA, ‘Compare the formal options’, AFSA website.

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[1].              Australian Financial Security Authority (AFSA), ‘Introduction to AFSA’, AFSA website.

[2].              AFSA, ‘What are my options for dealing with unmanageable debt?’, AFSA website; M Lane, ‘When does the initially unpalatable become palatable?’, Worrells website, 2 May 2017.

[3].              AFSA, ‘Compare the formal options’, AFSA website.

[4].              Bankruptcy Act, section 5 defines this as the stay period.

[5].              AFSA, ‘What is a declaration of intention to present a debtor’s petition (DOI)?’, AFSA website.

[6].              Bankruptcy is the legal process by which ‘the assets of a person who cannot pay his or her debts are removed from the person’s control (sequestered), placed in the hands of a trustee and distributed to creditors in the way the state has determined will best satisfy the competing interests involved’. T Mann (ed), Australian Law Dictionary, Oxford University Press, 2017; Bankruptcy Act, section 40 sets out the acts of bankruptcy.

[7].              AFSA, ‘What are the consequences of bankruptcy?’, AFSA website; Bankruptcy Act, section 77.

[8].              This default period may change to one year with the successful passage of the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 which is currently before the Senate. Bankruptcy Act, section 149.

[9].              AFSA, ‘What is a personal insolvency agreement?’, AFSA website. AFSA charges a $240 document processing fee when controlling trustee authority is lodged with AFSA, and 20 per cent of the value of the proposal accepted by creditors as an administration fee. AFSA, ‘Fees and charges’, AFSA website.

[10].              T Mann (ed), Australian Law Dictionary, op. cit., See also I Ramsay and C Sim, ‘Personal insolvency trends in Australia 1990–2008’, Insolvency Law Journal, 17(2), pp. 69–103.

[11].              D Williams (Attorney General and Minister for Justice), ‘Second reading speech: Bankruptcy Legislation Amendment Bill 1996’, House of Representatives, Debates, 26 June 1996, p. 2825.

[12].              Bankruptcy Act, sections 185C, 185D and 185E.

[13].              AFSA, ‘Indexed amounts’, AFSA website, last updated 18 January 2018. Limits are updated twice a year on 20 March and 20 September.

[14].              AFSA, ‘What is a debt agreement?’, AFSA website. Penalties and fines, Higher Education Contributions Scheme (HECS) debt and child support obligations cannot be included in a debt agreement and thus remain payable after the agreement is completed.

[15].              Bankruptcy Act, paragraph 185EC(1)(b).

[16].              A typical debt agreement may include the debtor paying the same amount as their outstanding debts over three to five years, with about 20 to 30 per cent going to the debt agreement administrator and the remaining 70 to 80 per cent going to creditors. Financial Rights Legal Centre, Submission to Treasury, National Innovation and Science Agenda – Improving bankruptcy and insolvency laws, May 2016. AFSA charges $200 to lodge a debt agreement proposal, and 20 per cent of the value of the proposal accepted by creditors for administering a debt agreement. AFSA, ‘Fees and charges’, AFSA website.

[17].              The AFSA ‘Debt comparison table’ shows which unsecured debts a debt agreement will cover, AFSA website.

[18].              Protected property under bankruptcy includes tools up to the value of $3,700 and vehicles up to the value of $7,800. AFSA, ‘Indexed amounts’, AFSA website, last updated 18 January 2018.

[19].              AFSA, ‘What are the consequences of a debt agreement?’, AFSA website.

[20].              Bankruptcy Act, section 185M.

[21].              V Chen, L O’Brien and I Ramsay, ‘An evaluation of debt agreements in Australia’, Monash University Law Review (forthcoming), 44(1), 2018; Consumer Action Law Centre, Submission to Treasury, National Innovation and Science Agenda – Improving bankruptcy and insolvency laws, 27 May 2016.

[22].              Chen, O’Brien and Ramsay, ‘An evaluation of debt agreements in Australia’, op. cit.

[23].              Credit licences are issued in accordance with Part 2-2 of Chapter 2 of the National Consumer Credit Protection Act 2009; an Australian Financial Services Licence is issued in accordance with Division 4 of Part 7.6 of the Corporations Act 2001.

[24].              AFSA, ‘Inspector-General Practice Statement 4 – Guidelines and processes for registration of debt agreement administrators’, AFSA website, last updated August 2013.

[25].              AFSA, ‘Inspector-General Practice Statement 2 – Regulation of bankruptcy trustees and debt agreement administrators in Australia’, AFSA website, last updated February 2017.

[26].              AFSA, Personal insolvency practitioners compliance report 2016–17, AFSA, Canberra, p. 11.

[27].              General consumer law prohibitions against misleading and deceptive and unconscionable conduct apply to the extent that the conduct relates to ‘financial services’ as set out in the Australian Securities and Investments Commission Act 2001 or to goods and non-financial services as set out in the Competition and Consumer Act 2010.

[28].              Bankruptcy Act, section 12 sets out the functions of the Inspector-General.

[29].              AFSA, Personal Insolvency Practitioners Compliance Report 2016-17, op. cit., pp. 14–15.

[30].              AFSA proactively monitors RDAA compliance to ensure misleading or unbalanced content is corrected, removed and/or referred to the Australian Securities and Investments Commission (ASIC) for investigation. In 2016–17, ten registered debt agreement administrators were deemed to have advertisements in breach of the guidelines that required remedial action. AFSA, ‘Inspector-General Practice Guideline 1 – Guidelines relating to advertising and marketing of debt agreements’, AFSA website, last updated July 2016.

[31].              P Ali, L O’Brien and I Ramsay, ‘Perspectives of financial counsellors and consumer solicitors on personal insolvency’, 15 September 2015, p. 1.

[32].              Ibid., p. 11.

[33].              Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 1996, p. 16.

[34].              Ali, O’Brien and Ramsay, ‘Perspectives of financial counsellors and consumer solicitors on personal insolvency, op. cit., p. 11.

[35].              M Dreyfus, ‘Second reading debate: Bankruptcy Amendment (Debt Agreement Reform) Bill 2018’, House of Representatives, Debates, (proof), 28 February 2018, pp. 31–2.

[36].              Ibid., p. 32.

[37].              M Turnbull (Prime Minister) and Christopher Pyne (Minister for Industry, Innovation and Science), National Innovation and Science Agenda, media release, 7 December 2015.

[38].              The Treasury, National Innovation and Science Agenda – Improving bankruptcy and insolvency laws, Consultation, 29 April 2016 – 26 May 2016.

[39].              Financial Rights Legal Centre, Submission to Treasury, National Innovation and Science Agenda – Improving bankruptcy and insolvency laws, May 2016, p. 9.

[40].              Ibid., pp. 9–10.

[41].              Ibid., p. 13.

[42].              Consumer Action Law Centre, Submission to Treasury, National Innovation and Science Agenda – Improving bankruptcy and insolvency laws, 27 May 2016.

[43].              Australian Securities and Investments Commission (ASIC), Paying to get out of debt or clear your record: the promise of debt management firms, January 2016.

[44].              Personal Insolvency Professionals Association (PIPA), Submission to Senate Legal and Constitutional Affairs Committee, Inquiry into Bankruptcy Amendment (Debt Agreement Reform Bill) 2018, 16 February 2018, p. 2.

[45].              Ibid., p. 3.

[46].              Ibid., p. 4.

[47].              Ibid.

[48].              Australian Restructuring Insolvency and Turnaround Association (ARITA), Submission to the Senate Legal and Constitutional Affairs Committee, Inquiry into Bankruptcy Amendment (Debt Agreement Reform Bill) 2018, 16 February 2018, p. 1.

[49].              Ibid., paragraph 2.2, p. 7.

[50].              Ibid., paragraph 2.3, p. 7.

[51].              Ibid., p. 8.

[52].              Australian Banker’s Association (ABA), Submission to the Senate Legal and Constitutional Affairs Committee, Inquiry into Bankruptcy Amendment (Debt Agreement Reform Bill) 2018, 16 February 2018, pp. 1–2.

[53].              Ibid.

[54].              Institute of Public Accountants, Submission to the Senate Legal and Constitutional Affairs Committee, Inquiry into Bankruptcy Amendment (Debt Agreement Reform Bill) 2018, February 2018, pp. 1–2.

[55].              Ibid., p. 3.

[56].              Ibid., p. 4.

[57].              C Symes, Submission to the Senate Legal and Constitutional Affairs Committee, Inquiry into Bankruptcy Amendment (Debt Agreement Reform Bill) 2018, 16 February 2018, pp. 1–2.

[58].              Ibid., p. 2.

[59].              Explanatory Memorandum, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, p. 2.

[60].              The Statement of Compatibility with Human Rights can be found at pages 4–7 of the Explanatory Memorandum to the Bill.

[61].              Item 4 of Part 1 in Schedule 1 to the Bill.

[62].              Explanatory Memorandum, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, p. 13.

[63].              Bankruptcy Act, proposed subsection 185C(3B).

[64].              Bankruptcy Act, proposed subsection 185LA(2).

[65].              Bankruptcy Act, paragraph 185C(4)(c). Under subsection 185C(5) of the Bankruptcy Act, the threshold amount in relation to a particular time, means seven times the amount that, at that time, is specified in column 3, item 2, Table B, point 1064-B1, Pension Rate Calculator A, in the Social Security Act 1991.

[66].              AFSA, ‘Indexed amounts’, AFSA website.

[67].              Explanatory Memorandum, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, p. 14.

[68].              Bankruptcy Act, subsection 185C(2D).

[69].              Bankruptcy Act, proposed paragraph 185C(4)(e).

[70].              Bankruptcy Act, proposed subsection 185C(4B).

[71].              Bankruptcy Act, proposed subsection 185E(2AB).

[72].              For example, Bankruptcy Act, section 139F and section 139T.

[73].              This is the person specified under proposed paragraph 185C(2)(c) as amended by item 1 of Part 1 in Schedule 1 to the Bill.

[74].              Explanatory Memorandum, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, p. 17.

[75].              Bankruptcy Act, proposed paragraphs 185C(2D)(f) and 185C(2D)(g).

[76].              Bankruptcy Act, proposed subparagraph 185EA(2)(a)(iii). Explanatory Memorandum, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, p. 18.

[77].              Bankruptcy Act, proposed subsection 185EA(4).

[78].              Bankruptcy Act, proposed subsection 185EC(1A).

[79].              Bankruptcy Act, proposed subsection 185EC(6). Under subparagraph 185C(2)(d)(i), a debt agreement proposal must provide that all provable debts in relation to the agreement rank equally.

[80].              Crimes Act 1914, subsection 4B(2) provides that where a natural person is convicted of an offence against a law of the Commonwealth punishable by imprisonment only, the court may, if the contrary intention does not appear and the court thinks it appropriate in all the circumstances of the case, impose, instead of, or in addition to, a penalty of imprisonment, a pecuniary penalty not exceeding the number of penalty units calculated using the formula: term of imprisonment x 5 where: Term of Imprisonment is the maximum term of imprisonment, expressed in months, by which the offence is punishable.

[81].              Explanatory Memorandum, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, p. 21.

[82].              Ibid., paragraph 122.

[83].              Bankruptcy Act, proposed subsection 185M(1D).

[84].              Item 20, Part 4, Schedule 1.

[85].              Item 21, Part 4, Schedule 1.

[86].              Item 1, Part 1, Schedule 2.

[87].              Bankruptcy Act, subsection 185C(2D).

[88].              Bankruptcy Act, proposed subsection 185M(2A).

[89].              Bankruptcy Act, proposed subsection 185M(2B).

[90].              Bankruptcy Act, proposed subsection 185M(2C).

[91].              Bankruptcy Act, proposed paragraph 185MA(4)(a).

[92].              Bankruptcy Act, proposed paragraph 185MA(4)(b).

[93].              Bankruptcy Act, proposed subsection 185MA(5).

[94].              Explanatory Memorandum, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, p. 28.

[95].              Bankruptcy Act, proposed subsection 185MC(6).

[96].              Explanatory Memorandum, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, p. 28.

[97].              Bankruptcy Act, proposed subsections 185PA(4), 185PA(5), 185PC(1A) and 185PC(1B).

[98].              Bankruptcy Act, proposed subsection 185PC(6).

[99].              Bankruptcy Act, subsection 185Q(4).

[100].              Bankruptcy Act, proposed paragraph 185Q(4)(ba).

[101].              Bankruptcy Act, subsection 185T(2).

[102].              Bankruptcy Act, subsection 185U(1).

[103].              Bankruptcy Act, subsections 185U(5) and (6).

[104].              Bankruptcy Act, proposed paragraphs 185T(2)(c)–(e).

[105].              Bankruptcy Act, paragraphs 19(1)(h) and (i).

[106].              Bankruptcy Act, proposed paragraphs 185LA(1)(d) and (e).

[107].              Bankruptcy Act, proposed paragraph 185LB(3)(c).

[108].              Bankruptcy Act, Schedule 2, paragraph 1-1(2)(a).

[109].              Bankruptcy Act, Schedule 2, subsection 65-25(1).

[110].              The imposition of strict liability means that a fault element does not need to be satisfied, but the offence will not criminalise honest errors and a person cannot be held liable if he, or she, had an honest and reasonable belief that they were complying with relevant obligations. Under section 4AA of the Crimes Act 1914, a penalty unit is equivalent to $210. This means the maximum penalty is $10,500.

[111].              Bankruptcy Act, proposed section 185LDA.

[112].              Explanatory Memorandum, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, p. 34.

[113].              Bankruptcy Act, Schedule 2, section 70-10.

[114].              Bankruptcy Act, proposed subsection 185LE(1A).

[115].              Explanatory Memorandum, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, p. 36.

[116].              Bankruptcy Act, Schedule 2, paragraph 70-5(3)(b).

[117].              Bankruptcy Act, Schedule 2, paragraph 20-20(4)(b).

[118].              Bankruptcy Act, proposed section 185A.

[119].              Bankruptcy Act, Schedule 2, section 25-1.

[120].              Bankruptcy Act, Schedule 2, section 20-20.

[121].              Bankruptcy Act, proposed subsection 186C(1A).

[122].              Bankruptcy Act, proposed subsection 186C(1).

[123].              Bankruptcy Act, proposed paragraph 186C(2)(f).

[124].              Bankruptcy Act, proposed paragraph 186C(2)(g).

[125].              Bankruptcy Act, Schedule 2, subsection 20-20(4).

[126].              Bankruptcy Act, proposed paragraphs 186C(4)(e)–(g).

[127].              Bankruptcy Act, subsection 186C(3).

[128].              Bankruptcy Act, Schedule 2, paragraph 20-75(1)(e).

[129].              Bankruptcy Act, proposed subsections 186F(3) and 186G(2A).

[130].              Bankruptcy Act, proposed subsections 186F(4) and 186G(2B).

[131].              This is consistent with item 19 of Part 4, Schedule 1.

[132].              Bankruptcy Act, proposed subsection 186H(1A).

[133].              This means the maximum penalty is $210,000.

[134].              Bankruptcy Act, Schedule 2, section 25-1.

[135].              Bankruptcy Act, proposed paragraphs 186K(3)(e) and (f) (for individuals) and proposed paragraphs 186L(3)(d)–(f) (for companies).

[136].              A reasonable suspicion is a suspicion based on facts which, objectively seen, are sufficient to give rise to an apprehension of the suspected matter. Suspicion carries less conviction than belief. To say that a suspicion is reasonable does not necessarily imply that it is well-founded or that the grounds for suspicion must be factually accurate. Source: Butterworths Concise Australian Legal Dictionary, 3rd edition, LexisNexis Butterworths, Australia, 2004, p.365.

[137].              Explanatory Memorandum, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, p. 48.

[138].              Bankruptcy Act, proposed subsection 20-35(3).

[139].              Bankruptcy Act, section 153A.

[140].              Bankruptcy Act, subsections 254(3) and 254(4).

[141].              Bankruptcy Act, subsection 252A(1).

[142].              Item 2 amends section 252A(5) of the Bankruptcy Act to insert references to proposed subsections 254(3)–254(9).

[143].              Bankruptcy Act, paragraph 254(2)(a).