The reports of the Senate Legal and Constitutional Affairs Committee on the one-year bankruptcy (BAEI Bill) and the debt agreement bill (BADAR Bill)[1] have accepted the reduction in the period of bankruptcy to one year, subject to a curious recommendation based on the views of ASIC.

That recommendation is to amend the Corporations Act

“to ameliorate the risk of the one-year default period being made available to bankrupts for whom such a concession is not a desirable or justifiable outcome”.

Put simply, to continue the three year period of disqualification of ex-bankrupt directors under s 206F of the Corporations Act. This seems to serve to reinforce the stigma of bankruptcy and retain it as an easy criterion available to ASIC to justify a long period of three-year oversight. It also seems inconsistent with the policy of these new laws under the innovation agenda. However, ASIC’s policy department, Treasury, made no public submission to clarify this.

The committee otherwise recommended that the Senate pass the BAEI bill.

As to the BADAR Bill, the committee recommends that the government consider amending it to allow for debt agreements implemented under a 3 year cap to be capable of being extended by up to an additional two years – to 5 years – by agreement of the debtor, creditors, and debt agreement administrator.

The committee also recommends that the government consider “including provision in the BADAR bill to require the minister to have regard to the cost of living for low-income households, the average cost of housing, and potential CPR increases, when setting the payment to income ratio, and whether differential payment to income ratios based on a debtor’s ability to cover costs of living at a reasonable standard could be appropriate”.

Otherwise, the committee recommends that the BADAR bill be passed.

Key provisions of the two bills

Bankruptcy Amendment (Enterprise Incentives) Bill 2017

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.

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).

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.

Bankruptcy Amendment (Debt Agreement Reform) Bill 2018

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.

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 (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).

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.

Amendments under Division 2 of Part 1 Schedule 1 would commence twelve months after receiving Royal Assent.

Key Concerns regarding the BAEI Bill

Many stakeholders including firms specialising in bankruptcy and personal insolvency have voiced their concerns over the proposed changes.  These key concerns include:

• inconsistency between the bill’s intention and its practical operation;
• the reduction in the default period;
• lack of anti-abuse provisions;
• operation of the income contribution obligations scheme;
• impact on the debt agreement regime; and
• inconsistency with other laws requiring financial reporting.

Key Concerns regarding BADAR Bill

Some of the key concerns about the BADAR Bill are:

• the tightening of registration standards for debt agreement administrators;
• the introduction of a three-year limit for debt agreements;
• the reasonableness of the payment to income ratio;
• doubling the asset threshold;
• restricting the voting process; and
• the potential effect the BADAR bill may have on bankruptcies

About Mark Harley | Principal

Mark has practiced in commercial law, commercial litigation and insolvency law for almost 10 years. He established the firm in 2014. With degrees in law and information technology, as well as being a director of several companies, Mark speaks the language of business owners and has a first hand understanding of the issues facing his clients.

[1] Bankruptcy Amendment (Enterprise Incentives) Bill 2017, Bankruptcy Amendment (Debt Agreement Reform) Bill 2018