26 March 2018

Senate Committee endorses reduction from three years to a one year bankruptcy period

This article was written by Emma Costello, Philip Pan, Priscilla Lal, Liam Hennessy and Morgan Windsor. 

The Senate Legal and Constitutional Affairs Legislation Committee (“the Committee”) has endorsed the passing of the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (“the Bill”) in its report dated 21 March 2018.[1]

Under the Bankruptcy Act 1996 (Cth) (“the Act”) as it presently stands, once a person is declared bankrupt, the period of bankruptcy, unless a successful objection is made, continues for three years.[2] During the bankruptcy period, a bankrupt is imposed with restrictions that may affect their income, employment, and ability to travel overseas.

If passed, which is now likely, the Bill will amend the Act by allowing a bankrupt to qualify for automatic discharge of their status after one year, rather than three years. This will align the bankruptcy period in Australia with the position in the United Kingdom. The amendments will apply to persons made bankrupt before the commencement.

The Bill aligns with the federal government’s reform of the insolvency framework, including the ipso facto regime, due to commence on 1 July 2018 (you can read our full report here), insolvent company director protections arising from the Safe Harbour reform, and the recent power conferred on creditors to remove external administrators without a court order.

Considerations by the Committee

It was submitted to the Committee that the Bill had the potential to allow people to “game the system”, by promoting excessive risk-taking, with lesser consequences and accountability for financial decision-making. 

It was also suggested that, to properly promote the Bill’s purpose of “fostering entrepreneurship”, the amendment should be directed to business-related bankruptcy, rather than taking a broad approach which encompasses personal bankruptcy. It was asserted by the Attorney-General’s Department, and accepted by the Committee, that drawing this distinction would be impractical, or even impossible. 

As a way to moderate the risk, ASIC submitted that the Corporations Act 2001 (Cth) should be amended to elevate the minimum director requirements, such as excluding a person made bankrupt within three years from sole directorship, and deter phoenix activity[3] that may arise from the amendment. The Committee supported ASIC’s submission.

Notably, the Bill will also:

  • relieve the urgency with which a bankrupt is required under the Act to inform the trustee of his or her name change or place of residence, granting the bankrupt 10 business days to provide that information;[4] and
  • extend the income contribution obligations to two years, and up to five to eight years in cases of bankruptcy extension due to noncompliance. This will be used as a mode of enforcing the compliance of a discharged bankrupt, and alleviate the risk of abuse of the shorter bankruptcy period.

Takeaway points

Interested parties should be aware that, once the Bill passes:

  • it commences six months after receiving Royal Assent, so creditors need to ensure systems are in place to preserve their rights and make objections quickly against existing bankrupts that will be able to avail themselves of the shorter one year period;
  • trustees in bankruptcy may be placed under increased pressure to complete investigations and possibly take action to recover assets for the creditors of the bankrupt’s estate in a much shorter period; and
  • there may be changes to the Corporations Act 2001 (Cth) to limit the risk to creditors arising from phoenix activity. This may include, for example, increasing the director disqualification period from five years to seven years.

[1] In the same report, the Committee also endorsed the passing of the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018.

[2] See section 149 Bankruptcy Act 1996 (Cth).

[3] The registration of a new company following the insolvency of a predecessor company.

[4] See section 80 Bankruptcy Act 1996 (Cth).

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