Chapter 1
Introduction and background
1.1
On 30 November 2017, pursuant to a report of the Senate Standing
Committee for Selection of Bills, the Senate referred the provisions of the
Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (BAEI bill) to the
Senate Legal and Constitutional Affairs Legislation Committee (the committee).[1] On 7 December 2017, the provisions of the Bankruptcy Amendment (Debt Agreement
Reform) Bill 2018 (BADAR bill) were referred to the committee through a similar
means.[2]
1.2
Both bills were referred for inquiry and report by 19 March 2018.
Conduct of the inquiry
1.3
In accordance with usual practice, the committee wrote to a number of
persons and organisations, inviting submissions to the BAEI bill and the BADAR
bill by 31 January 2018 and 16 February 2018 respectively. The inquiries were
also made public on the committee's website.
1.4
The committee received 20 submissions to the BAEI bill inquiry and 19
submissions to the BADAR bill inquiry, which are listed at Appendix 1. Submissions
are also available in full on the committee's website.[3]
1.5
The committee held concurrent public hearings for both bills in Sydney
on 5 March 2018 and in Melbourne on 6 March 2018.
Bankruptcy verses debt agreements
1.6
The Bankruptcy Act 1966 (Cth) (the Act) provides a number of
options for a debtor with unmanageable debt to take control of their personal
affairs, while also allowing for creditors to receive a portion of what they
are owed. Debt agreements, which were introduced in 1996 in Part IX of the Act,
were 'designed to be a low cost alternative to bankruptcy for persons with few
if any divisible assets, and low income levels.'[4]
1.7
The eligibility requirements and restrictions differ between the schemes.
The following table, produced by the Australian Financial Security Authority
(AFSA), compares a number of the key eligibility requirements and restrictions
for bankruptcies and debt agreements:
Table 1—Comparison between bankruptcies and debt agreements[5]
|
Bankruptcy |
Debt Agreement |
Australian connection |
Must have a residential or business connection. |
No residential or business connection required. |
Previous insolvency |
While previous insolvency does not by itself make a person
ineligible, 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. |
Income threshold |
No. |
Yes, a person cannot propose a debt agreement if their after tax
income for the year is more than $83,756.40 |
Asset threshold |
No. |
Yes, a person cannot propose a debt agreement if their divisible
property is more than $111,675.20. |
Debt threshold |
No. |
Yes, a person cannot propose a debt agreement if their unsecured
debts are more than $111,675.20. |
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. |
Ability to travel overseas |
Prior consent of trustee required. A fee is payable where the trustee
is the Official Trustee. |
No statutory restrictions. |
Ability to be a director of, or otherwise manage, a corporation |
No. |
Yes. |
Purpose of the bills
1.8
The two bills propose significant changes in relation to bankruptcy and
debt agreements.
Bankruptcy Amendment (Enterprise Incentives) Bill 2017
1.9
The BAEI bill proposes to amend the Act to provide for a reduction of
the default period, and other time periods associated with bankruptcy, from
three years to one year.[6]
1.10
The Explanatory Memorandum to the BAEI bill sets out the purpose of the
proposed amendments:
The aim of the Bill is to foster entrepreneurial behaviour and
reduce the stigma associated with bankruptcy while maintaining the integrity of
the regulatory and enforcement frameworks for the personal insolvency regime.[7]
1.11
Introducing the bill into the Senate, the Assistant
Minister to the Prime Minister, Senator the Hon. James McGrath, explained that under existing arrangements, personal insolvency laws have heavy consequences
for those declared as bankrupt. Bankrupts are subject to penalties such as
being locked out of their profession, the inability to travel overseas, and
having to identify as a bankrupt. Under current law, these penalties are
applied to the bankrupt person for a period of three years following the
declaration of bankruptcy.[8] The Assistant Minister stated that these penalties are viewed as 'stigmatising
and penalising failure'.[9]
1.12
The proposed amendments address a recommendation made by a Productivity
Commission report in 2015 that the default bankruptcy period should be reduced,
particularly in relation to restrictions on travel, finance and employment.[10]
Bankruptcy Amendment (Debt
Agreement Reform) Bill 2018
1.13
The BADAR bill provides for tighter regulation of the debt agreement
regime, which is intended to boost confidence in the sector's integrity, 'deter
unscrupulous practices, enhance transparency, and ensure that the regime is
accessible and equitable.'[11]
1.14
The Attorney-General, the Hon. Christian Porter MP, explained the
rationale for the proposed changes to the debt agreement regime as follows:
Between 2007 and 2016, new debt agreements increased from
6,560 to 12,640 per year. Over the same period, new bankruptcies declined from
25,754 to 16,842 per year. To respond to increasing usage of debt agreements
and evidence of consumer exploitation by the debt agreement industry, the
government is proceeding with a comprehensive reform of Australia's debt
agreement system.
It will boost confidence in the professionalism of debt
agreement administrators, deter unscrupulous practices and enhance
transparency. This bill will ensure that the debt agreement system is
accessible to debtors who have the financial capacity to enter into debt
agreements.[12]
Key provisions of the bills
Bankruptcy Amendment (Enterprise Incentives) Bill 2017
1.15
Section 149 of the Act currently provides that a bankrupt qualifies for
an automatic discharge after a period of three years, and is subject to a
number of restrictions during the period of bankruptcy. The bill would reduce
the default period of bankruptcy to one year. As part of the reduction of the
default period, other relevant time periods associated with bankruptcy would
also be reduced to one year.
1.16
The key proposed amendments include:
- inserting a new subsection to section 149 that would provide for
an automatic discharge after one year of bankruptcy to apply to persons who
become bankrupt after the commencement of the new subsection, which would
remove certain restrictions such as overseas travel, obtaining credit and
company board eligibility (Items 18 and 19) at the expiration of the bankruptcy
period; and
- repealing subsection 80(1) and replacing it with a requirement
for the bankrupt to notify the trustee within 10 business days of changes to
their name, address, and phone number during the 'prescribed period'. It also
would insert a new definition of 'prescribed period' and of 'bankrupt' for the
purposes of section 80 (Items 4 and 5).
1.17
The amendments in the BAEI bill would commence six months after
receiving Royal Assent in order to allow trustees, debtors and creditors to
adjust and to prepare any objections to discharge.[13]
Bankruptcy Amendment (Debt
Agreement Reform) Bill 2018
1.18
The provisions of the BADAR bill would enact a suite of reforms to
Australia's debt agreement regime. The amendments would address a broad
spectrum of areas regarding debt agreements, including who can be a registered
debt agreement administrator, the powers of the Official Receiver and the
Inspector-General, and the administration of debt agreements.
1.19
The key proposed amendments include:
- amending subsection 185C(2) to restrict the category of persons
who may be authorised to deal with debtor's property (Schedule 1, Items 1 and
2);
- inserting 185C(2AA), which would provide that a debt agreement
proposal cannot propose for payments to be made under the agreement for a
timeframe longer than three years from the day the agreement was made;
- amending subsection 185C(4)(c) to increase the asset value
threshold for a debtor entering a debt agreement[14] (Schedule 1, Item 17);
- inserting subsection 185C(4)(e), which would provide that a
debtor cannot give the Official Receiver a debt agreement proposal if the total
payments under agreement exceed the debtor's income by a certain percentage (Schedule
1, Item 20). Further, the percentage may be determined by the Attorney-General
by legislative instrument as per new subsection 185C(4B) (Schedule 1, Item 21);
-
inserting subsection 185E(2AB), which would provide that the
Official Receiver can refuse to accept a debt agreement proposal for processing
if the Official Receiver reasonably believes that the debt agreement would
cause undue hardship to the debtor (Schedule 1, Item 23);
- amending section 185LA to extend the duties of a debt agreement
administrator to reflect those conferred on trustees under paragraphs 19(1)(h)
and (i) of the Bankruptcy Act (Schedule 2, Item 23); and
- conferring power on the Inspector-General to refuse to approve an
application for registration as a registered debt agreement administrator if
the individual is not a fit and proper person (Schedule 3, Items 5 and 6).
1.20
The majority of the amendments in the BADAR bill would commence six
months after receiving Royal Assent. According to the BADAR Explanatory Memorandum,
this would allow debt agreement administrators and AFSA time to sufficiently
prepare for the commencement of the reforms.[15] Amendments under Division 2 of Part 1 Schedule 1 would commence twelve months
after receiving Royal Assent.
Reports of other committees
1.21
The Senate Standing Committee for the Scrutiny of Bills (Scrutiny
Committee) noted that subsection 80(1) of the Act requires a bankrupt to
'immediately' inform the trustee, in writing, of a change of name or principal
residence that occurs during their bankruptcy.[16] The Scrutiny Committee noted that pursuant to subsection 80(1) of the BAEI bill
this would be amended to 'within 10 business days' and the way in which the
trustee is informed would be amended to 'a manner determined or approved by the
trustee'.[17]
1.22
The Scrutiny Committee reported that, pursuant to subsection 80(1A) of
the Act, a breach of this requirement is subject to six months imprisonment and
that this offence is a strict liability offence.[18]
1.23
The Scrutiny Committee raised concern that the punishment of six months
imprisonment for a strict liability offence is beyond the recommended
punishment of up to 60 penalty units for a strict liability offence, as
outlined in the Guide to Framing Commonwealth Offences, Infringement Notices
and Enforcement Powers.[19]
1.24
In response to this concern, the Attorney-General acknowledged that
proposed subsection 80(1) does not comply with the Guide and that he 'will
seek to amend item 4 Schedule 1 of the Bill to ensure compliance with the
Guide.'[20]
1.25
The Scrutiny Committee made no further comments in light of the
Attorney-General’s undertaking.
1.26
The Parliamentary Joint Committee on Human Rights (PJCHR) also
considered the BAEI bill and reported that the bill does not raise human rights
concerns.[21]
1.27
At the time of writing, neither the Scrutiny committee nor the JCHR have
commented on the BADAR bill.
Report outline
1.28
This report consists of four chapters:
-
this chapter provides a brief background and overview of the
bills, as well as the administrative details of the inquiries;
- chapter 2 sets out the issues raised by submitters in relation to
the BAEI bill;
- chapter 3 sets out the issues raised by submitters in relation to
the BADAR bill; and
- chapter 4 outlines the committee's views and recommendations in
relation to both bills.
References to the Hansard transcript
1.29
References to the Hansard are to the proof Hansard. Page numbers may
vary between the proof and the official transcript.
Acknowledgements
1.30
The committee thanks all organisations and individuals who made
submissions and provided evidence to this inquiry.
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