Bills Digest No. 8 2001-02
Bankruptcy Legislation Amendment Bill 2001
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Bankruptcy Legislation Amendment Bill
2001
Date Introduced: 7 June 2001
House: House of Representatives
Portfolio: Attorney-General
Commencement: On Proclamation or 6 months after
Royal Assent, whichever is the earlier. The commencement of a few
items relating to the change from the Administrative Appeals
Tribunal to the Administrative Review Tribunal is deferred,
reflecting the delay in the passage of the Administrative Review
Tribunal Bill 2000.
To make a number
of significant changes to the Bankruptcy Act 1966 which,
it is hoped, will encourage debtors to seriously consider using
alternatives to bankruptcy where possible, and will make bankruptcy
less of an 'easy option'.
The Commonwealth has
power, pursuant to section 51(xvii) of the Constitution, to
regulate bankruptcy and insolvency. Under this power, it has
enacted the Bankruptcy Act 1966, which applies to an
individual who is unable to pay his or her debts.
Company insolvency matters are regulated separately by the
Corporations Law. Although sometimes the words 'bankruptcy' and
'insolvency' are used interchangeably, 'insolvency' is a broader
term. It refers to the inability to satisfy creditors or discharge
liabilities, whereas technically 'bankruptcy' refers only to the
formal process of being adjudged insolvent by a court.
The administration of personal bankruptcy
matters (but not company insolvencies) is carried out by the
Insolvency and Trustee Service Australia (ITSA) which is an
executive agency within the Attorney-General's portfolio. Prior to
1 July 2000, ITSA was a part of the Attorney-General's Department.
The administrative head of ITSA is the Inspector-General in
Bankruptcy.
The Official Trustee in Bankruptcy is a body
corporate established under section 18 of the Bankruptcy Act
1966. Official Receivers act on behalf of the Official Trustee
in Bankruptcy.(1) There is one Official Receiver
appointed for every bankruptcy district in Australia, that is, for
each State and each of the Northern Territory and the
ACT.(2)
Basic overview of bankruptcy
The primary purposes of modern bankruptcy law
are twofold. First, it enables proceedings to be taken to recover
most kinds of property from a person who is unable to pay his or
her accumulated debts, and use that property to pay the creditors
in proportion to the amounts each is owed. Secondly, once a
debtor's property has been distributed among creditors, bankruptcy
law enables the debtor to make a fresh start free from the burden
of accumulated debts. In earlier times (commencing at the end of
the 13th century in England), debtors could be imprisoned for
non-payment of their debts.(3)
The first step in the bankruptcy process is
usually when a person petitions an Official Receiver for his or her
own bankruptcy.(4) In 1999-2000 approximately 95 per
cent of all bankruptcies resulted from a debtor's
petition.(5) The other 5 per cent of bankruptcies
resulted from a creditor's petition. This is an application by a
creditor to either the Federal Court or the Federal Magistrates'
Court(6) for a sequestration order, where a debtor owes
a debt of at least $2000 (or debts totalling at least $2000), and
has committed an 'act of bankruptcy'.(7) Once a
sequestration order is made, the debtor becomes bankrupt.
When an individual becomes bankrupt his or her
property and finances are placed in the hands of a trustee in
bankruptcy. In approximately 94 per cent of all bankruptcies, the
trustee is the Official Trustee.(8) In the remaining 6
per cent of cases, the trustee in bankruptcy is a private
'registered trustee', an accountant who must be registered under
the Bankruptcy Act 1966.(9)
The trustee collects and realises all the
debtor's available property. The trustee then calls for detailed
claims from creditors as to what debts the debtor owes them. These
are known as 'proofs of debt'. The trustee then distributes the
proceeds of the sale to the creditors in order of priority. If the
trustee cannot pay a class of creditors in full, they are paid in
proportion to the debts owed to each.
Most of a debtor's property is available to pay
creditors, but certain property - including basic household
furniture and effects, certain tools of trade or property used to
earn a living, and a car up to a certain value - is
exempt.(10) In addition, certain transactions entered
into prior to the petition for bankruptcy (in some cases dating
back as far as 5 years(11)) are rendered void, and the
money or property must be handed over to the trustee for
distribution to creditors.(12) A bankrupt who earns
income during the period of bankruptcy must also contribute some of
his or her income above a threshold amount to the estate, to be
divided among the creditors.(13)
After three years, a bankrupt is automatically
discharged from bankruptcy, unless the trustee or Official Receiver
objects, in which case the discharge is postponed for either two or
five years, depending on the ground of objection.(14) A
person is also eligible to apply for early discharge of bankruptcy
at any time after 6 months in certain circumstances.(15)
Discharge of bankruptcy releases a person from any future
obligation to pay the portion of debts which may remain unpaid
after the bankruptcy period has ended. However, certain debts
remain payable, such as child maintenance and bail
bonds.(16) There is also currently a bill before
Parliament which proposes excluding any accumulated HECS debt or
semester debt from cancellation on discharge from
bankruptcy.(17)
There are three alternatives to actual
bankruptcy provided for in Part X of the Bankruptcy Act
1966, which are entering into a deed of
assignment,(18) a deed of
arrangement(19) or a composition with
creditors.(20) There are a number of specific formal
procedures applicable to Part X arrangements, including procedures
for meetings of creditors. Since 1996, there has also been a
simplified, low cost alternative procedure, a debt
agreement under Part IX,(21) which is designed for
debtors with relatively low levels of debt, low income and few
assets.
Increase in incidence of bankruptcy and
need for reform
Bankruptcies have increased threefold over the
past ten years to a level of 23 298 in 1999-2000, compared
with 8493 in 1989-1990. The clear majority of bankruptcies are not
business-related. In the financial year 1999-2000 there were 3899
(16.7%) business-related bankruptcies(22) and
19 399 (83.3%) non-business bankruptcies. The proportion of
business-related bankruptcies has halved in the last 10 years, from
34.7 per cent in 1989-1990.(23)
There were also 801 Part IX debt agreements
accepted by creditors in 1999-2000.(24) The use of debt
agreements has increased exponentially since they were first
introduced in 1996. There were 47 debt agreements in 1996-1997, 369
in 1997-1998, and 480 in 1998-1999.(25)
In contrast to bankruptcy and other alternatives
to bankruptcy, the use of Part X arrangements has declined
significantly. In 1999-2000, only 453 arrangements, assignments and
compositions under Part X were accepted,(26) compared
with approximately 800 a decade ago.(27) This decline is
not solely attributable to the introduction of the alternative Part
IX debt agreements, as it began several years prior to 1996.
Commenting on the general increase in the
incidence of bankruptcy, Terry Gallagher, the Inspector-General in
Bankruptcy, has stated that:(28)
While it is no easier to go bankrupt now than it
has been for many years it is likely that excessive borrowing
prompted by ready credit availability, perceptions of attainable
living standards and a lessening of the stigma of bankruptcy have
contributed to this increase.
There has been significant controversy in recent
times over revelations that several Sydney barristers, including
high-ranking Queen's Counsel, were using bankruptcy as a means of
avoiding paying substantial amounts of tax. The Attorney-General is
reported to have denied that the present amendments are a response
to these revelations.(29) Other, non-legislative,
measures have been introduced to address this
problem,(30) and State and Territory governments are
encouraged to deal legislatively with the issue. New South Wales
has recently introduced legislation to make it clear that certain
acts of bankruptcy constitute professional misconduct and render a
barrister or solicitor liable to be struck off unless he or she can
give a satisfactory explanation.(31)
Although some of the amendments proposed in the
Bill will increase the powers of regulatory bodies to deal with
high-income earners who are using bankruptcy to avoid their debts,
the majority of the amendments appear to have arisen out of concern
at the general increase in the number of bankruptcies. The clear
majority of bankrupts are in fact low income earners(32)
who owe creditors relatively small amounts of money,(33)
rather than high-profile bankrupts. In this context, many of the
amendments are targeted at consumers who 'overspend on their credit
cards or run up debts with small businesses', and divorcees who use
bankruptcy to avoid sharing property with a former
spouse.(34) The Government has proposed the present
reform package in the hope that the amendments will counter
community perceptions that it is 'too easy' to become
bankrupt(35) by encouraging 'people contemplating
bankruptcy to consider the seriousness of the step they are about
to take and to try alternatives to bankruptcy,'(36) as
well as restoring community confidence in the bankruptcy system, by
'clamp[ing] down on those who use bankruptcy in a mischievous or
improper way'.(37)
The major reforms proposed are:
- the introduction of a mandatory 30 day cooling-off period to
encourage debtors to enter into a settlement with creditors
- giving the Official Receiver a discretion to reject a debtor's
petition which appears to be an abuse of the bankruptcy
process
- the abolition of early discharge provisions
- strengthening trustees' power to make objections to
discharge
- strengthening the Court's power to annul bankruptcy, and
- doubling the income threshold for debt agreements.
An explanation of each of the main reform
proposals is provided separately in the Main Provisions section.
The Bill also proposes a large number of other amendments to the
Bankruptcy Act, including changes to the trustee
registration scheme, changes to the voting procedures for meetings
of creditors, and changes consequential on ITSA becoming an
executive agency separate from the Attorney-General's
department.
Exposure drafts of the Bill and its companion,
the Bankruptcy (Estate Charges) Amendment Bill 2001, were
circulated in early 2001, after drafting notes were circulated in
December 2000. Briefing sessions and consultation forums with
industry groups including members of the Bankruptcy Reform
Consultative Forum and groups of registered trustees, legal
practitioners and financial counsellors in each State were held in
February 2001.(38) As a result of these consultations,
the Government agreed to some changes to the original proposal.
The Bills have now been referred to the Senate
Legal and Constitutional Committee for report by 7 August 2001.
The six major reform proposals fall into three
main groups, provisions aimed at making bankruptcy more difficult,
those which encourage use of alternatives to bankruptcy, and those
which address abuses of the bankruptcy system.
Provisions aimed at making bankruptcy
more difficult
Abolition of early discharge
provisions
Currently, the standard period of bankruptcy is
three years.(39) After three years, bankruptcy is
automatically discharged unless an objection to discharge is
lodged. However, a bankrupt is eligible for early discharge of
bankruptcy at any time after 6 months, if he or she satisfies
certain criteria. Early discharge is only available for those on a
low income who are unable to pay their creditors at all, or who are
unable to pay the trustee's remuneration and expenses in
full.(40) However, a person may not apply for early
discharge if his or her debts exceed 150 per cent of his or her
income, or he or she is otherwise disqualified.(41)
Under the current law, about 60 per cent of all
bankrupts are eligible for early discharge, and about half of these
actually seek to be discharged early.(42) The Bill
proposes to abolish the early discharge provisions altogether
(item 154).(43) Now, the minimum period
of bankruptcy will be three years and there will be no exceptions.
It was earlier proposed to reduce the standard period of bankruptcy
to two years rather than three,(44) as a trade-off for
removing the early discharge, but this proposal has not been
carried through.
The former Minister for Justice and Customs,
Senator Amanda Vanstone, explained the abolition of early discharge
provisions by saying: 'many creditors feel that the possibility of
being released from bankruptcy after six months does not reflect
the serious nature of the decision to become
bankrupt.'(45) It was also felt that early discharge
provisions 'discourage debtors from trying to enter formal or
informal arrangements with their creditors to settle debts, and
provide little opportunity for debtors to become better financial
managers'.(46)
Other justifications advanced by the Government
for the abolition of the early discharge provisions
are:(47)
- they were initially intended to apply to those who became
bankrupt out of misfortune (those with few assets and low incomes)
rather than misdeed, but it seems inappropriate to thus imply that
all those with some assets or income have been guilty of incurring
debts in bad faith, and
- they apply in a discriminatory way, by excluding women who have
joint debts with, and generally a lower income than, their spouse,
and thus are disqualified by the 150% rule.
Provisions encouraging use of
alternatives to bankruptcy
Doubling the income threshold
for debt agreements
As described above, Part IX debt agreements are
intended to provide a simple, low cost alternative to the various
Part X arrangements. They are currently only available to debtors
whose annual after-tax income is less than $30 530. This
relatively low threshold has been criticised as denying a
considerable number of debtors 'any realistic alternative to
bankruptcy'.(48)
The Bill proposes to double the after-tax income
threshold for eligibility to enter into debt agreements, to
approximately $61 000 (item 177), which will
ensure a much wider group of debtors has access to Part IX debt
agreement arrangements.
In future, the Official Receivers rather than
the Official Trustee will have responsibility for the functions
relating to debt agreements (items 171-176, 178, 180,
182-193).
Mandatory 30 day cooling-off
period
Currently, there is effectively an optional 7
day cooling-off period in the Bankruptcy Act 1966. This
arises because a debtor has a choice to simply present a debtor's
petition for bankruptcy, or to first present a declaration of
intention to present a debtor's petition. If a debtor lodges a
declaration of intention, a 7 day stay period applies during which
most debts (excepting secured debts and child maintenance
obligations) are frozen and cannot be enforced by
creditors.(49) At the end of this period, the protection
is removed, and the debts become enforceable again. A debtor may,
but does not have to, present a debtor's petition after lodging a
declaration of intention.
The Bill repeals the provisions dealing with a
declaration of intention and the 7 day stay period (item
38)(50) because it proposes the introduction of
a mandatory 30 day cooling-off period after a debtor's petition is
presented (new subsections 55(4B) and 57(5A)).
This means that debtors will not become bankrupt until 30 days
after presenting their petition. This is designed to give debtors
who may have acted hastily an opportunity to reconsider whether
bankruptcy is the best option, as well as to give creditors an
opportunity to negotiate an alternative arrangement with the
debtor.(51)
However, under new subsections 55(4B)
and 57(5A) the cooling off period will not be available in
a number of circumstances, including:
- where the debtor has already unsuccessfully attempted an
alternative to bankruptcy (such as a Part IX debt agreement or a
Part X arrangement) in the preceding 12 months,
- the debtor was carrying on a business during the 30 days prior
to presenting a petition, or
- where a creditor's petition or other legal proceeding for
recovery of a debt of at least $2000 is already pending against the
debtor.
The Official Receiver also has a discretion to
determine that the cooling-off period does not apply, if it is
likely to result in a reduction of the dividend to creditors
(new subsections 55(4C) and 57(5B)). The
cooling-off period also does not apply where a debtor lodges a
debtor's petition as a member of a partnership (items 50
and 51), or in the case of deceased estates. If the
cooling-off period does not apply for any of these reasons, then
the debtor becomes bankrupt immediately on the presentation of the
petition (new subsections 55(4D) and 57(5C)).
If the cooling-off period applies, then the
debtor can withdraw the petition at any time within the 30 days,
and avoid bankruptcy (new subsections 55(4E) and (4F) and
57(5D) and (5E)).(52) If the petition is not
withdrawn, the debtor becomes bankrupt after 30 days (new
subsection 55(4G) and 57(5F)).
During the cooling-off period, most of the
debtor's debts are frozen and cannot be enforced by creditors
(new sections 55A and 57AA). This does not apply
to new debts incurred during the cooling-off period. However, a
creditor may apply for a court order under new
section 55B or 57AB directing a trustee to take
control of the debtor's property during the cooling-off period. A
court must grant this order if it would be in the interests of
creditors.
Provisions targetted at abuses of the
bankruptcy system
Official Receiver's discretion
to reject a debtor's petition
Currently, an Official Receiver has only limited
power to reject a debtor's petition. He or she has a discretion to
reject a debtor's petition only if the petition does not comply
substantially with the approved form, the petition is not
accompanied by a statement of affairs, or if he or she thinks that
the statement of affairs accompanying the petition is
inadequate.(53)
The Bill proposes that, in addition to these
reasons, Official Receivers be given a discretion to reject a
debtor's petition where it appears that the debtor would be likely
to be able to pay all of his or her debts in a reasonable time, and
one of the following applies:
- the debtor appears unwilling to pay one or more creditors,
or
- the debtor has been bankrupt on his or her own initiative at
least three previous times, or
- the debtor has previously been bankrupt on his or her own
initiative in the last 5 years (items 40 and
60).
This amendment is directed at abuses of the
bankruptcy system by people with a capacity to pay their debts who
have either singled out a particular creditor for non-payment (such
as the Australian Tax Office) or who are multiple
bankrupts.(54)
The Official Receiver does not have to make use
of this power, and any decision to refuse a debtor's petition on
this ground is subject to review by the Administrative Appeals
Tribunal.
In addition, an Official Receiver must reject a
debtor's petition where the debtor (or each debtor in the case of
joint debtors) does not have a connection with Australia, either
through residency or carrying on a business here.(55)
This restriction already applies to bankruptcies on a creditor's
petition.(56)
Strengthening the Court's power
to annul bankruptcy
Currently, the Federal Court and the Federal
Magistrates' Court have power to annul a bankruptcy if the
sequestration order (in the case of a creditor's petition) or the
petition (in the case of a debtor's petition) 'ought not to have
been' made.(57) This power has been interpreted as being
limited to situations where the debtor is ineligible for
bankruptcy, for example, the debtor is in fact solvent, or where
the bankruptcy is an abuse of process or a fraud on the court.
Commentators suggest that it is generally not possible to annul a
bankruptcy where the debtor is insolvent.(58)
The Bill proposes an amendment to make it clear
that in the case of a debtor's petition, the Court will have power
to annul a bankruptcy which 'ought not to have been' made even
where the debtor is insolvent (item 156). The
Explanatory Memorandum notes that this power is intended
to apply in the case of high income bankrupts who are technically
insolvent but could make arrangements to pay their debts (including
their tax liabilities), although 'they choose not to while
maintaining an expensive lifestyle'. These situations could be
considered by a court to be an abuse of the bankruptcy process,
leading the Court to annul the debtor's
petition.(59)
Strengthening of objections to
discharge
As noted, most bankruptcies are automatically
discharged after the expiry of three years. However, if an
objection to discharge is made, the period of bankruptcy may be
extended for another two or five years, depending on the ground of
objection.(60)
Currently, the trustee or an Official Receiver
may lodge an objection to discharge. The Bill proposes to remove
the Official Receiver's power to object (items 133, 134,
141-146,(61) 148, 151), on the
basis that this is more appropriately a function for the
trustee.
The Government believes that it is difficult for
trustees to successfully sustain objections to bankruptcy. This is
because of two main factors. First, in addition to identifying a
ground of objection (something in the bankrupt's conduct), a
trustee must give a reason for objecting to discharge. This may be
to advance the administration of the bankrupt estate, or to force
the bankrupt to discharge a duty he or she has not discharged.
However, it is not a permissible reason to punish the bankrupt for
failure to cooperate with the trustee.(62)
Secondly, objections by trustees are frequently
cancelled on review by the Inspector-General, the Administrative
Appeals Tribunal or the Federal Court. Often this occurs when a
bankrupt has been uncooperative in refusing to provide information,
and just before or even during a review hearing the bankrupt
finally provides the information requested by the
trustee.(63) The Government considers these provisions
do not encourage bankrupts to cooperate with trustees in the
administration of their bankruptcy. The Government proposes to
strengthen the objection-to-discharge provisions where a 'special
ground' exists, by removing the need for the trustee to give a
reason for objecting to discharge, and making it more difficult for
review bodies to cancel an objection to discharge.
'Special grounds'
The Bill identifies a list of grounds, to be
known as 'special grounds', which will be sufficient to found an
objection to discharge. If an objection to discharge is made on a
special ground, the bankruptcy will be extended by five years
(item 130). Many of the existing grounds which
would result in an extension of the bankruptcy period by five years
will become special grounds, including:
- failing to return to Australia when requested to by the
trustee
- failing to provide information about property, income or
expected income to the trustee on request
- failing to provide particulars of income or expected
income
- failing to pay an income contribution to the trustee during the
bankruptcy period, and
- failing to explain to the trustee a disposal of property or
expenditure of money during the 5 years preceding the
bankruptcy.
One ground which currently extends a bankruptcy
by two years will be classified as a special ground. This is
refusal or failure to sign a document when required to do so by the
trustee. The Bill additionally proposes four new special
grounds:
- transfer of property with the intention of defeating creditors
(item 136)
- intentionally providing false or misleading information to the
trustee after becoming bankrupt (item 137)
- intentionally failing to disclose a liability (item
138), or
- intentionally failing to disclose a beneficial interest in
property (item 140).
Failing to disclose a liability or a beneficial
interest in property are already, and will continue to be, grounds
which result in a two year extension of bankruptcy, whether or not
the failure to disclose was intentional. They will constitute
'special grounds' resulting in an extra five years of bankruptcy
only where there has been an intentional failure to disclose.
'Special grounds' are significant for two
reasons. First, the trustee will not have to provide a reason for
objecting to a bankrupt's discharge if at least one special ground
is present (item 135). This means that the sole
purpose of the objection may be to punish the bankrupt for
non-cooperation, the objection need not further the administration
by the trustee in any way.
Secondly, an objection which specifies at least
one special ground must not be cancelled by a review body if there
is sufficient evidence to support the ground and the bankrupt fails
to provide a reasonable excuse for his or her conduct (new
subsection 149N(1A)). Additionally, review bodies must not
take into account any conduct of the bankrupt after the ground
first commenced to exist (new subsection
149N(1B)).
Ordinary grounds of objection
If an objection to discharge is made on an
ordinary ground, the bankruptcy period will be extended by two
years (item 130). Three grounds which currently
increase a bankruptcy period by five years will not be classified
as 'special grounds', and in future will result in an increase in
the period of bankruptcy of only two years. One of these is
engaging in misleading conduct after the date of bankruptcy
concerning amounts totalling in excess of $3000.(64)
From the bankrupt's perspective, the culpability involved in
misleading conduct seems broadly comparable to the 'special ground'
of providing false or misleading information, although the latter
affects the trustee in his or her conduct of the administration
whereas the former affects potential future creditors of the
bankrupt.
Grounds which will extend the period of
bankruptcy for two years include:(65)
- failing to disclose a liability or a beneficial interest in
property
- failing to attend a meeting of creditors or a bankruptcy
examination without excuse, and
- failing to notify the trustee of change of name, address or
daytime telephone number.
In addition, the Bill puts forward two new
ordinary grounds of objection:
- transfer of property at an undervalue or for no consideration,
or to give preference to one creditor over others (item
136), and
- failure to notify the trustee of any material change in the
bankrupt's circumstances (items 86 and 139).
If a trustee objects to discharge of bankruptcy
on one of these grounds, he or she will have to provide a reason
for his or her objection to discharge. Further, the bankrupt's
conduct after the objection arose will continue to be relevant in
review proceedings seeking to have the objection cancelled. This is
to be contrasted with objections based on a 'special ground', for
which no reason needs to be given, and in relation to which any
post-objection conduct of the bankrupt is to be disregarded.
Other amendments
The Bill makes a number of other amendments of a
minor or machinery nature. The majority of these are succinctly
summarised in a description of the bankruptcy reforms package
prepared by Don Costello of ITSA.(66)
A number of items remove references to the
'Department' or the 'Secretary' of the Department, and substitute
references to ITSA and the Minister (items 8, 10, 13, 17,
18, 19, 103, 157, 162, 164, 168). This is because ITSA is
now an APS executive agency separate from the Attorney-General's
Department. Although the Inspector-General and all the Official
Receivers will now be appointed directly by the Minister rather
than by the Secretary of the Department, the current appointments
will continue in force (items 229 and 230).
The majority of the reforms proposed do not
appear to have generated significant opposition. In part, this may
be a function of the consultation process which was undertaken
prior to the Bill being introduced, which gave interest groups an
opportunity to comment on the reform proposal, as a result of which
the Government subsequently altered some of the details of the
measures. Some concerns exist in relation to objections to
discharge, and alternatives to bankruptcy.
Concerns about bankruptcy
alternatives
Consumer advocates have welcomed the expansion
of eligibility for debt agreements, which will allow many middle
income earners to access this alternative to bankruptcy. At the
same time, however, Virginia Noonan of the Financial Consumer
Rights Council is concerned that this could result in low-income
debtors entering into private arrangements with creditors which
they are unable to fulfil, because they are unlikely to be able to
afford an accountant to negotiate on their behalf the terms of a
debt agreement with creditors.(67) A similar concern
arises in relation to the mandatory 30 day cooling off period,
which will give creditors time to approach debtors with alternative
repayment options.(68) The difficulty is not so much
with the Bill, which merely provides the option of bankruptcy
alternatives, but with the difference in bargaining power between
some debtors and creditors, which may lead debtors to agree to
terms or arrangements which they are unable to meet.
Concerns about the strengthening of
objections to discharge
The amendments proposed in the Bill will make it
easier where a 'special ground' exists for a trustee to sustain an
objection to discharge of bankruptcy at the end of the three year
period, and harder for a bankrupt to have an objection cancelled.
The Attorney-General noted that the 'special grounds' 'will apply
to deliberate actions by bankrupts which frustrate trustees, and
add unnecessarily to the costs of administrations.'(69)
The four new special grounds proposed in the Bill all cover
intentional actions by the bankrupt. However, none of the six
existing grounds which will be classified as special grounds need
necessarily be deliberate actions. The word 'failure' contained in
each of those grounds has been interpreted in the context of
bankruptcy as imposing a strict liability on the bankrupt, whether
the relevant conduct was intentional or
non-intentional.(70) For example, a bankrupt may fail to
provide information, or may fail to return from overseas when
requested, either because he deliberately intends not to cooperate
with the trustee, or because he has been unavoidably absent by
reason of family circumstances.
Yet the mere existence of any of these grounds,
including a ground based on non-intentional conduct, will be
sufficient to extend the period of bankruptcy by a further five
years on top of the initial three year standard period of
bankruptcy. This is a serious sanction, which may be justifiable in
cases where a bankrupt is deliberately being non-cooperative with a
trustee, but seems excessive in other circumstances.
Additionally, it seems incongruous that no
reason needs to be given when a trustee objects on a 'special
ground', when the consequence of such an objection is five
additional years of bankruptcy, whereas the trustee must provide a
reason for pursuing an objection relating to non-intentional
conduct leading to only two extra years of bankruptcy.
A further difficulty is posed by the removal of
the power of review bodies to cancel an objection based on conduct
of the bankrupt after the objection is lodged but prior to review.
The Bill would permit a review body to cancel a trustee's objection
on a special ground where the bankrupt is able to demonstrate a
'reasonable excuse'. This seems intended to safeguard bankrupts
whose conduct was not intended to frustrate the trustee. However,
it may be difficult for bankrupts to prove a reasonable excuse if,
as the Bill provides, their subsequent conduct (for example, in
providing an explanation to the trustee as to why they belatedly
complied with his or her request) may not be taken into
account.
It is true that the trustee retains a discretion
not to file an objection in most cases,(71) or to
withdraw an objection at any time.(72) It may be that
trustees confronted with genuine cases of hardship will not pursue
an extension of the bankruptcy period. However, the Bill on its
face would permit them to maintain their objection, as it does not
require them to give a reason justifying their decision to object.
It is of concern that the new provisions are framed to give this
power to the trustee, and to remove avenues of review from the
various review bodies, particularly when the consequence of
establishing a special ground is serious.
Typographical error
The reference in new paragraph
149N(1A)(c) (item 149) to paragraph 149D(1)(h) may be a
typographical error, and should be a reference to paragraph
149D(1)(f).(73)
Will the Bill achieve its aims?
The Bill contains two proposals which will
better equip the regulatory authorities to deal with abuse of the
bankruptcy system by debtors with high incomes, such as the
recently publicised barristers using bankruptcy to avoid paying
tax. These are the power to reject a debtor's petition which is an
abuse of process, and the power to annul a bankruptcy even where
the debtor is technically insolvent. Strengthening the trustee's
power to object to discharge of bankruptcy is directed at any,
whether high or low income earners.
The other major proposals appear to be targetted
predominantly at low income earners, who constitute the majority of
bankrupts. Doubling the income threshold for eligibility to enter
into a debt agreement, and enforcing a mandatory 30 day cooling off
period prior to bankruptcy commencing are both proposals aimed to
encourage debtors to consider alternatives to bankruptcy. Consonant
with this, the Bill intends to make the bankruptcy process more
difficult and hence less attractive to debtors, by abolishing the
opportunity for early discharge, and by introducing new powers to
object to discharge and lengthen the period of bankruptcy in cases
where bankrupts fail to cooperate with their trustees.
Despite these intentions, it is unclear whether
the changes made by the Bill will have the desired effect of making
bankruptcy more difficult. Terry Gallagher, the Inspector-General
in Bankruptcy, is reported to have admitted that while the proposed
reforms are important in terms of curbing abuses of the bankruptcy
system, he does not expect they will result in a huge dent in
bankruptcy numbers.(74)
The Bill also does not deal specifically with
other ongoing bankruptcy-related problems, such as the ability of
debtors to put assets beyond the reach of creditors (for example,
by transferring or acquiring assets in other people's names), or
the interaction of bankruptcy law with family law issues. A
Sydney Morning Herald editorial commented 'these changes
to the bankruptcy law, though welcome, hardly begin to deal with
the larger, more complicated problem.'(75)
- Subsection 18(8) of the Bankruptcy Act 1966.
- The Jervis Bay Territory is included within the Bankruptcy
District of New South Wales, and Christmas Island and Cocos
(Keeling) Islands are within the Bankruptcy District of Western
Australia. See proclamation of Bankruptcy Districts on 15 September
1993, Gazette GN38 on 29 September 1993, reprinted in
McDonald, Henry and Meek, Australian Bankruptcy Law and
Practice, (1996, revised 5th ed), Vol 1, at
[13.0.10].
- See Dennis Rose, Lewis: Australian Bankruptcy Law, The
Law Book Company, Sydney, 1994 (10th ed), pp. 8-9.
- Section 55 of the Bankruptcy Act 1966.
- ITSA, Annual Report 1999-2000, Table 2.1, p. 7. The
full text is available online at
http://law.gov.au/aghome/commaff/itsa/documents/itsa_annual_report_2000.pdf
(accessed 3 July 2001).
- The Federal Court and the Federal Magistrates' Court have
concurrent jurisdiction in bankruptcy, under section 27 of the
Bankruptcy Act 1966.
- See sections 42, 43 and 44 of the Bankruptcy Act 1966.
There are a number of 'acts of bankruptcy' listed in section 40 of
the Bankruptcy Act 1966, including assignment of property
for creditors' benefit, departure from Australia or from the
debtor's usual place of business with intent to defeat creditors,
failure to pay a debt where a final judgment order has been made,
and admission of insolvency at a meeting of creditors followed by
failure to voluntarily lodge a debtor's petition for bankruptcy
within 7 days of the meeting.
- ITSA, Annual Report 1999-2000, Table 2.1, p. 7.
- See Part VIII Division 1 of the Bankruptcy Act
1966.
- Section 116 of the Bankruptcy Act 1966.
- These include transfers of property for no consideration or at
less than market value any time in the last five years, section 120
of the Bankruptcy Act 1966.
- These include transfers to defeat creditors, section 121 of the
Bankruptcy Act 1966, or transfers in favour of a certain
creditor or creditors to give them preference over other creditors,
section 122 of the Bankruptcy Act 1966.
- See section 139J and Part VI Div 4B of the Bankruptcy Act
1966.
- Subsection 149(4) of the Bankruptcy Act 1966.
- Sections 149S and 149T of the Bankruptcy Act
1966.
- Section 153 of the Bankruptcy Act 1966.
- The Higher Education Funding Amendment Bill 2001.
- Under a deed of assignment, a debtor hands over all his or her
divisible property to a trustee who divides the property for the
benefit of the creditors, subsection 187(1) of the Bankruptcy
Act 1966. Entry into a deed of assignment releases the debtor
from those debts which would otherwise have comprised his or her
bankruptcy, section 230 of the Bankruptcy Act 1966.
- Under a deed of arrangement, a debtor's financial affairs are
administered for him or her, subsection 187(1) of the
Bankruptcy Act 1966. This may include running the debtor's
business or assigning future income. A deed of arrangement does not
release the debtor from all his or her debts unless the deed
specifically so provides, section 234 of the Bankruptcy Act
1966.
- Under a composition, creditors accept less than the full amount
of the debt as full satisfaction, or agree to a schedule of
instalments, subsection 187(1) of the Bankruptcy Act
1966.
- The debtor makes a debt agreement proposal - which may involve
payment of less than the full amount of the debts or periodic
payments or a moratorium on payments - to the Official Trustee, and
creditors decide whether or not to accept it.
- A business related bankruptcy is defined as being one in which
an individual's bankruptcy is directly related to his or her
proprietary interest in a business or company: Insolvency and
Trustee Service Australia, Annual Report 1999-2000, Table
2.2, p. 8.
- ITSA, Annual Report 1999-2000, Table 2.2, p. 8.
- ITSA, Annual Report 1999-2000, Table 16.1, p. 35.
- ITSA, Quarterly Bankruptcy Statistics - Debt
Agreements, http://law.gov.au/aghome/commaff/itsa/stats/Qtr_Pt_IX.pdf
(accessed 4 July 2001).
- These comprised 48 assignments, 205 arrangements and 200
compositions: ITSA, Annual Report 1999-2000, Table 17.1,
p. 40.
- Although there were only 561 Part X arrangements in 1989-1990,
this figure was unusually low, as the figures for the preceding and
following years were 795 and 805 respectively. This increased to
953 in 1991-1992, before beginning a steady decline. See ITSA,
Quarterly Bankruptcy Statistics - Part X Administrations,
http://law.gov.au/aghome/commaff/itsa/stats/Qtr_Pt_X.pdf
(accessed 4 July 2001).
- Terry Gallagher, Inspector-General in Bankruptcy, ITSA,
Reforms to the Bankruptcy Act, http://law.gov.au/aghome/commaff/itsa/frame_bankreforms.html
(accessed 3 July 2001).
- Reported by Jason Koutsoukis, 'Tighter laws to control
bankruptcy', Australian Financial Review, 7 June
2001.
- 'Procedures will be introduced to ensure that Commonwealth
departments and agencies do not engage barristers who use
bankruptcy as a means of avoiding tax.' The Hon Daryl Williams MP
and Senator the Hon Rod Kemp, 'Bankruptcy and Taxation
Obligations', Joint News Release, 9 March
2001.
- The Legal Profession Amendment (Disciplinary Provisions) Bill
2001 was introduced in the Legislative Assembly on 22 June 2001,
and passed the Legislative Assembly on 26 June 2001. It was amended
in the Legislative Council on 2 July 2001, and the amendment is
currently before the Legislative Assembly for consideration.
- The single biggest group by occupation in 1999-2000 was
unemployed persons, with 5208 bankrupts, followed by pensioners
with 2112, and housewives/ househusbands with 2088. Tradespersons
and labourers experienced many more bankruptcies than did managers
and professionals. ITSA, Annual Report 1999-2000, Table
14, p. 29.
- It is reported that half of all bankrupts owe unsecured
creditors less than $14,000: Mary Byrne, 'Why bankruptcy is the
latest craze', Financial Review, 28 March 2001.
- The Hon Daryl Williams MP, Answer to Question without Notice:
Bankruptcy, House of Representatives, Hansard, 6 June
2001, p. 26233.
- Terry Gallagher, Inspector-General in Bankruptcy, ITSA,
Reforms to the Bankruptcy Act. See also Sen the Hon Amanda
Vanstone, 'New Bankruptcy Laws Address Community Concern',
Media Release, 11 May 2000.
- The Hon Daryl Williams MP, 'Bankruptcy Reforms Legislation
Package', News Release, 5 June 2001. See also Terry
Gallagher, Inspector-General in Bankruptcy, ITSA, Reforms to
the Bankruptcy Act.
- The Hon Daryl Williams MP, second reading speech on the
Bankruptcy Legislation Amendment Bill 2001, House of
Representatives, Hansard, 7 June 2001, p. 26305.
- Terry Gallagher, Inspector-General in Bankruptcy, ITSA,
Reforms to the Bankruptcy Act.
- Section 149 of the Bankruptcy Act 1966.
- Section 149T of the Bankruptcy Act 1966.
- Section 149Y of the Bankruptcy Act 1966. Other
disqualifications include previous bankruptcy, or failure to
disclose a number of matters, including beneficial interests in
property, existing liabilities, or projected income.
- The Hon Daryl Williams MP, second reading speech on the
Bankruptcy Legislation Amendment Bill 2001, House of
Representatives, Hansard, 7 June 2001, p. 26305.
- Items 33, 46, 52, 65, 129, 132, 215
and 216 repeal other references to the early discharge
provisions.
- Senator the Hon Amanda Vanstone, 'New Bankruptcy Laws Address
Community Concern', Media Release, 11 May 2000.
- ibid.
- The Hon Daryl Williams MP, second reading speech on the
Bankruptcy Legislation Amendment Bill 2001, House of
Representatives, Hansard, 7 June 2001, p. 26305.
- See Don Costello, Acting Adviser, ITSA, 'Bankruptcy Reforms
Package' in New Directions in Bankruptcy (March 2001) Vol
11 No 1, http://www.itsa.gov.au/aghome/commaff/itsa/frame_pubs.html
(accessed 2 July 2001).
- Explanatory Memorandum, p. 11.
- See Division 2A of Part IV of the Bankruptcy Act
1966.
- Items 4, 5, 6, 7, 11 and 27 repeal other
references to the declaration of intention provisions.
- The Hon Daryl Williams MP, second reading speech on the
Bankruptcy Legislation Amendment Bill 2001, House of
Representatives, Hansard, 7 June 2001, p. 26305.
- The only exception is that a debtor cannot withdraw a petition
if a creditor has obtained a court order under new
section 55B or new section 57AB directing a
trustee to take control of the debtor's property.
- Subsection 55(3) of the Bankruptcy Act 1966.
- See the Hon Daryl Williams MP, second reading speech on the
Bankruptcy Legislation Amendment Bill 2001, House of
Representatives, Hansard, 7 June 2001, p. 26305.
- New subsection 55(2A), inserted by
item 39, and new subsection
57(2A), inserted by item 59.
- Paragraph 43(1)(b) of the Bankruptcy Act 1966.
- Technically, section 153B of the Bankruptcy Act 1966
provides for annulment of bankruptcy if a sequestration order ought
not to have been made or a debtor's petition ought not to
have been presented or ought not to have been
accepted by the Official Receiver. For simplicity, the
text uses the phrase 'ought not to have been' made to cover all
three.
- Re Coyle (1993) 42 FCR 72 at 77. See McDonald, Henry
and Meek, Australian Bankruptcy Law and Practice, (1996,
revised 5th ed), Vol 1, at [153B.0.25].
- Explanatory Memorandum, p. 35.
- Section 149A of the Bankruptcy Act 1966.
- Item 141 also removes reference to a right of
review before the Administrative Appeals Tribunal. Henceforth, the
bankrupt must request internal review by the Inspector-General
prior to seeking external review by the Administrative Appeals
Tribunal (item 152. See also item
124).
- Inspector-General in Bankruptcy v Nelson (1998) 168
ALR 340. See also Explanatory Memorandum, pp. 9-10.
- See Don Costello, Acting Adviser, ITSA, 'Bankruptcy Reforms
Package' in New Directions in Bankruptcy (March 2001) Vol
11 No 1.
- Paragraph 149D(1)(c) of the Bankruptcy Act 1966. The
other grounds are leaving Australia and not returning, and
continuing to manage a corporation without leave while bankrupt,
paragraphs 149D(1)(a) and (b) of the Bankruptcy Act
1966.
- The grounds are set out in paragraphs 149D(1)(i), (j), (l), (m)
and (n) of the Bankruptcy Act 1966.
- Don Costello, Acting Adviser, ITSA, 'Bankruptcy Reforms
Package' in New Directions in Bankruptcy (March 2001) Vol
11 No 1.
- Kath Cummins, 'Harder line on bankruptcy', Financial
Review, 12 May 2000.
- ibid.
- The Hon Daryl Williams MP, second reading speech on the
Bankruptcy Legislation Amendment Bill 2001, House of
Representatives, Hansard, 7 June 2001, p. 26305.
- In Re Woodman and Inspector-General in Bankruptcy
(1996) 40 ALD 800, the Administrative Appeals Tribunal held that
the bankrupt had 'failed' to provide information when requested by
the trustee, and thus the trustee was entitled to sustain an
objection under paragraph 149D(1)(d) of the Bankruptcy Act
1966. It did not matter that the bankrupt's failure was not
deliberate, but the consequence of a heavy workload he had
undertaken in an attempt to rehabilitate himself. However, the
tribunal was able to cancel the trustee's objection on the basis
that the bankrupt had subsequently complied with the request and
extension of bankruptcy would have adverse consequences for him.
This flexibility will not be available where a 'special ground'
exists.
- Under subsection 149B(2) of the Bankruptcy Act 1966 a
trustee must lodge an objection if the trustee believes there is no
other way to force the bankrupt to discharge a duty which he or she
has failed to discharge. In all other cases, the choice whether or
not to lodge an objection is in the hands of the trustee.
- Section 149J of the Bankruptcy Act 1966.
- New paragraph 149N(1A)(c) provides that where
a bankrupt can demonstrate a 'reasonable excuse', a review body may
cancel a trustee's objection to discharge, except where the
objection is founded on paragraph 149D(1)(h). That paragraph
contains the ground of failing to return to Australia when
requested by the trustee. However, the discussion in the
Explanatory Memorandum refers to the ground of non-payment
of assessed contributions, Explanatory Memorandum, p. 34.
This seems to suggest that the reference should be to paragraph
149D(1)(f), which contains the ground of non-payment of assessed
contributions.
- Mary Byrne, 'Why bankruptcy is the latest craze', Financial
Review, 28 March 2001.
- 'Bankruptcy reforms', Sydney Morning Herald, 11 June
2001.
Katrine Del Villar
25 July 2001
Bills Digest Service
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