One (1) year bankruptcy, a wider scope of Part IX Debt Agreements and regulation of pre-insolvency advisors are on the agenda for the new Federal Government.

In January 2021, the then Coalition Government undertook public consultation on possible changes to Australia’s bankruptcy system.  The purpose of this consultation was to ensure the bankruptcy system was addressing and responding to the impacts of the COVID-19 pandemic.

As part of the consultation, the Government sought submissions regarding four key elements of the Bankruptcy Act 1966 (the “Act”), including:

1. the default period of bankruptcy;
2. debt agreements (under Part IX of the Act);
3. Personal Insolvency Agreements (under Part X); and
4. offence provisions.

Key stakeholders, including members of the public, insolvency practitioners, peak bodies and consumer advocates made submissions on these topics.  In accordance with the “Bankruptcy Systems – Options Paper” released by the Attorney-General’s Department in January 2022, the then Coalition Government was considering reforms that included reducing the period of bankruptcy from three (3) years to one (1), promoting debt agreements, and targeting untrustworthy advisers.

The default period of bankruptcy

A bankrupt is automatically discharged from bankruptcy at the end of three (3) years from the date on which their Bankruptcy Form (formerly ‘statement of affairs’) is filed and accepted by the Official Receiver, of the Australian Financial Security Authority (“AFSA”).  This is subject to any objection to discharge by the Trustee.

The 3-year period came into consideration following the introduction of the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (“Enterprise Bill”) to Parliament, which proposed to reduce the default period of bankruptcy from 3 years to 1.  The reduction of the default period of bankruptcy was not a novel concept and was intended to “promote entrepreneurial activity”.

However, some stakeholders have expressed that reducing the default period will be abused by rogue, reckless and repeat bankrupts.  With respect to reducing the default period as a direct response to the pandemic, the Law Council of Australia made submissions that a 1-year default bankruptcy period should not be introduced simply to deal with the possible elevated levels of personal insolvency associated with the effects of COVID-19 and that it should only be introduced if it is considered to be good policy generally.

Similar sentiments were expressed by the Australian Banking Association (“ABA”), stating that reducing the default period could increase the incidence of bankruptcy and instil a culture of bankruptcy, namely, “normalising bankruptcy as an option for dealing with debt”.

The former Government maintained the view that the Enterprise Bill remained fit for purpose, subject to modifications to address the concerns of stakeholders, such as:

• excluding eligibility for 1-year bankruptcy in certain circumstances;
• strengthening objections to discharge provisions;
• retaining income contributions for 3 years; and
• strengthening offence provisions.

Debt agreements

Debt agreements offer a statutory alternative to bankruptcy and a solution for managing personal debt, having been the subject of significant reforms introduced by the Bankruptcy Amendment (Debt Agreement Reform) Act 2018.  Since the reforms were introduced, there has been a decline in the number of new debt agreements, which is likely attributable to the temporary measures introduced by the Government in response to COVID-19, such as increasing the debt threshold for bankruptcy proceedings.

In response to the decline in debt agreements, the Coalition Government proposed extending the maximum term for debt agreements from (3) years (unless a home-owner) to (5) years.  Stakeholders had expressed that the 3-year limit has restricted the formation of new debt agreements and that extending the default term means that debtors will have access to sustainable debt agreements with the extended term limit, which in turn would provide creditors with reasonable prospects for a commercial return.

This amendment would mean that the home ownership exemption would no longer be applicable and the five (5)-year maximum debt agreement term would be available to all debtors.

The Coalition Government had also proposed increasing the eligibility thresholds for debt agreements, meaning that the debt agreement system would be more accessible to a wider range of debtors with higher incomes and levels of debt.

Untrustworthy advisors

The Coatition Government was also considering strengthening the regulation of untrustworthy advisers, and furthermore, introducing new offences to the Act to target offences.

The ABA, in their submissions on this matter, supported greater regulation of the pre-insolvency space, raising concerns that advisers may encourage individuals and businesses in financial distress to engage in unlawful conduct, such as hiding or stripping assets and illegal phoenixing.  These sentiments were largely supported by the Government in their consideration for new offences relating to such conduct, as well as introducing a new requirement that registered trustees make preliminary enquiries about pre-insolvency advice.

In his speech conceding the seat of Kooyong, the former Treasurer, Josh Frydenberg mentioned reforms to insolvency as one of his proud achievements.  It remains to be seen whether the new Labor Government will continue with the insolvency law reform agenda.