Encouraging Reckless Spending or Ambitious Entrepreneurs?

Encouraging Reckless Spending or Ambitious Entrepreneurs?

22Feb

Government to Reduce Bankruptcy Period to One Year

In Australia, the bankruptcy period is currently three years. During this period a bankrupt must comply with numerous requests from the trustee including, but not limited to, providing statements of affairs, seeking the trustee’s consent to travel overseas, and potentially even garnishing wages.

As part of its National Innovation Statement, in the last half of 2015 the Government announced its intention to reduce the bankruptcy period from three years to one. The move has been promoted as a positive step to protect creditors and encourage entrepreneurship across Australia.

The Productivity Commission proposed the idea in its report on Business Set-up, Transfer and Closure, which was sent to the Government in September 2015 and released to the public in December. In its report, the Commission made the following recommendations regarding personal insolvency:

Recommendation 1 – Automatic Discharge after 1 Year

 That the Bankruptcy Act 1966 should be amended so that, where no offence has occurred, a bankrupt is automatically discharged after one year. Specifically, this should apply to restrictions relating to overseas travel, holding an office under the Corporations Act 2001, employment within certain professions and access to personal finance.

 The trustee, and the courts, should retain the power to extend the time until the bankrupt is discharged for a period of up to eight years if there are concerns regarding the bankrupt’s conduct. Any extensions should be recorded on the National Personal Insolvency Index.

Recommendation 2 – Continuation of Income Contribution Regime

 The obligation of bankrupts to make excess income contributions to their trustee should remain for three years. The period of excess income contributions can be extended at the discretion of the trustee to up to eight years. If the period of bankruptcy is extended beyond three years, then excess income contributions should be required until discharge.

 

Given that these recommendations are still quite new, there will undoubtedly be a number of discussions about whether a decreased bankruptcy period will reduce the ramifications of bankruptcy for debtors and make their decision to go into bankruptcy easier thanks to faster rehabilitation. Concerned parties are also deliberating on whether a shorter bankruptcy period will encourage irresponsible borrowing and spending.

Nevertheless, if these recommendations become law, it appears that they would have minimal impact upon the administration of a bankruptcy file (and creditors).

Creditors — The position of creditors to claim in an estate will remain unchanged. They will be entitled to submit a proof of debt in the estate and, subject to acceptance of their claim, participate in any dividends that the trustee may pay from the estate.

Assets — All divisible assets as at the date of bankruptcy will still be available for realisation by the trustee, with the only impact being on ‘after-acquired’ property (i.e., property that devolves on a bankrupt while they are undischarged such as lottery winnings or inheritances).

Income Contributions — Despite the reduced bankruptcy period, income contributions will still have to be paid (if applicable) for three years (or longer) as is currently the case.

Trustee powers — A trustee’s statutory powers to recover assets and voidable transactions will continue to be available.

Whether the proposed reduced bankruptcy term will meet is stated objective of encouraging more Australians to take more risks, be more innovative, and therefore more ambitious remains to be seen. However from the creditors’ perspective, it appears that they will not be unfairly disadvantaged by the proposals.

The Government has indicated that a proposal paper that includes the above recommendations will be released in the first half of this year, with a view to the introduction and passage of legislation in mid-2017. We will continue to report on developments as they occur, watch this space.