COVID-19 Economic response—temporary relief for financially distressed individuals


The Australian Financial Security Authority statistics show that bankruptcies fell by 10.6% in the period from October to December 2019; and that there were 3,385 new bankruptcies in Australia in that time. However, the emergence of the COVID-19 pandemic can be expected to create significant financial pressure on many companies. As Dr Scott Kiel-Chisholm of the Queensland University of Technology writes:

… the impact of bankruptcy on the debtor can be personally devastating on the bankrupt’s self-esteem, ability to obtain bank loans and secure specific employment and business positions. Indeed, impact of the bankruptcy may extend to the debtor’s family members and friends and to creditors who may be unable to recover the full repayment of the debt.

On 23 March 2020 the Parliament enacted the Coronavirus Economic Response Package Omnibus Act 2020 (Omnibus Act). The trigger for the Omnibus Act was the addition, on 21 January 2020, of ‘human coronavirus with pandemic potential’ to the Biosecurity (Listed Human Diseases) Determination 2016 as a listed human disease—and the unfolding health and economic consequences of the spread of coronavirus. Schedule 12 of the Omnibus Act contains amendments to put into effect four temporary measures intended to avoid unnecessary bankruptcies.

Creditor’s petition

A creditor can make a person bankrupt through a court process—called a creditor’s petition. Section 44 of the Bankruptcy Act 1966 sets out the conditions under which a creditor’s petition may be presented. These include, amongst other things, that the amount of the debt is at least $5,000.

Measure 1—increasing the minimum amount for creditors petition

Schedule 12 of the Omnibus Act amends the Bankruptcy Act so that a creditor’s petition can only be presented if the amount of the debt is the statutory minimum, being either $5,000 or a higher, prescribed amount. In turn the Bankruptcy Regulations 1996 are amended so that the prescribed amount is $20,000.

Act of bankruptcy

Personal insolvency is primarily regulated by the Bankruptcy Act 1966 and the Bankruptcy Regulations 1996. Section 40 of the Bankruptcy Act specifies that certain conduct is an act of bankruptcy. In particular, paragraph 40(1)(g) provides that a debtor commits an act of bankruptcy if a creditor has obtained a final judgment or final order in relation to the debt and has served a bankruptcy notice on the debtor—but the debtor fails to comply with the requirements of the notice.

Measure 2—increasing the minimum amount for a bankruptcy notice

Section 41 of the Bankruptcy Act permits a creditor to apply to an official receiver to issue a bankruptcy notice against the debtor. Schedule 12 of the Omnibus Act amends the Bankruptcy Act so that a bankruptcy notice can only be issued if, amongst other things, the amount of the final judgment or order is at least the statutory minimum, which is either $5,000 or a higher, prescribed amount. The amendment to the Bankruptcy Regulations 1996 in measure 1 above applies so that a bankruptcy notice cannot be issued if the amount of the relevant judgment or order is less than $20,000.

Measure 3—extending the time for complying with a bankruptcy notice

Schedule 12 of the Omnibus Act inserts subsection 41(2A) into the Bankruptcy Act so that a bankruptcy notice must specify the period for compliance being:

  • where the notice was served in Australia—within the statutory period after the debtor is served with the notice or
  • where the notice was served elsewhere—the period specified by the court order giving leave to effect the service.

This is called the time fixed for compliance with a bankruptcy notice. The reference to the time fixed for compliance is important because once that time has elapsed the debtor has committed an act of bankruptcy.

Schedule 12 of the Omnibus Act makes a number of amendments to align the terms used in sections 40 and 41 of the Bankruptcy Act by amending subparagraph 40(1)(g)(i), subsections 41(5) and (6) and subsection 42(1). The effect of the amendments is that a debtor must comply by the time fixed for compliance with a bankruptcy notice.

The definition of the term statutory period, being either 21 days or a longer, prescribed period, is also inserted. In turn the Bankruptcy Regulations are amended so that the prescribed period is six months. This means that a debtor has six months to respond to a bankruptcy notice before an act of bankruptcy occurs.

Declaration of intention

Section 54A of the Bankruptcy Act enables a debtor with unmanageable debt who meets certain eligibility criteria to get immediate and temporary protection from enforcement action by unsecured creditors until the debtor has fully considered his or her options.

The temporary stay on enforcement action (called the stay period) is 21 days and is available if the debtor presents a declaration of intention (DOI) to petition for bankruptcy. The debtor may wish to negotiate payment arrangements with creditors during this period or consider formal insolvency options, including bankruptcy.

Details of the DOI do not appear on the National Personal Insolvency Index (NPII).

Measure 4—extending the timeframe for DOI protection

Schedule 12 of the Omnibus Act amends section 5 of the Bankruptcy Act to repeal that part of the definition of stay period which refers to 21 days and to replace it with a reference to the term default period, being either 21 days or a longer, prescribed period. In turn the Bankruptcy Regulations are amended so that the prescribed period is six months.

Temporary nature of the measures

The relevant parts of the Bankruptcy Regulations are automatically repealed at the end of the period of six months starting on the day the Regulation commences.

It may be that these temporary measures will need to be extended once six months have elapsed. In that case, the Government will be able to do that by way of legislative instrument. However, it will be necessary to carefully balance the rights and obligations of both debtors and creditors before that occurs.

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