Shining a spotlight on Australia’s bankruptcy laws

By Emma Mos*

COVID-19 has led to some of the most significant changes to insolvency laws that Australia has ever seen, and it’s not just corporate insolvency legislation that the federal government has made changes to – protection measures have also been applied to personal insolvency. In this article, we look at the temporary – and permanent – protection measures that have been applied, the discussion paper around further changes to the Bankruptcy Act, and we take a deeper look at the proposed one-year bankruptcy period.

In March 2020, the federal government introduced a number of temporary measures in response to the COVID-19 pandemic and the associated economic impacts. These temporary measures included: 1. The debt threshold for creditors to apply for a Bankruptcy Notice against a debtor increased from $5000 to $20,000. 2. The timeframe for a debtor to respond to a Bankruptcy Notice before a creditor could commence bankruptcy proceedings increased from 21 days to up to six months.

3. The temporary protection period

available for debtors to prevent recovery action by unsecured creditors increased from 21 days to six months. The temporary measures were initially scheduled to cease on September 24, 2020 but were extended until December 31, 2020. And on January 1 this year, the bankruptcy threshold permanently changed to $10,000, doubling the pre-pandemic threshold of $5,000, while the amount of time to respond to a Bankruptcy Notice and the period of temporary debt protection both reverted back to 21 days.

However, the ending of the temporary measures was not the end of the matter. In January this year, the federal Attorney-General’s Department released a discussion paper entitled The Bankruptcy system and the impacts of coronavirus. The aim was to seek stakeholder submissions on possible changes to the personal insolvency system – The Bankruptcy Act 1966 – to inform the government’s ongoing response to address the impacts of the pandemic.

There are four key areas of the Bankruptcy Act under review: 1. The default period of bankruptcy being reduced from three to one year. 2. Debt agreements (regulated under Part IX of the Bankruptcy

Act which offer an alternative to bankruptcy to debtors, provided certain threshold requirements are met). 3. Personal insolvency agreements.

Also known as a Part X, a personal insolvency agreement (PIA) is a legally binding agreement ➤

between a debtor and their creditors and can be a flexible way to come to an arrangement to settle debts without becoming bankrupt. 4. Offence provisions. The abuse of the personal insolvency system to avoid paying debts is a concern that is frequently raised by stakeholders. And while illegal phoenix activity is generally associated with corporate insolvency, similar behaviour in the personal insolvency system by debtors as well as their advisers is also a key concern. The

Bankruptcy Act contains offences, including offences punishable by imprisonment.

Let’s take a closer look at the one-year bankruptcy period. Is it a good idea or a bad one?

One-year bankruptcies have been widely discussed previously and were last proposed in December 2015, when the government introduced legislation to reduce the default bankruptcy period from three years down to just one year. The aim was to reduce the stigma associated with bankruptcy, encourage entrepreneurs to re-engage in business sooner and encourage people – previously deterred by punitive bankruptcy laws – to pursue their own business ventures. While there was extensive public consultation on the proposal, widespread industry discussion and legislation drafted to make the change, the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 was introduced to Parliament on October 19, 2017 but was never passed and lapsed with the calling of the 2019 federal election.

However, it appears that this is now back on the table as a result of the pandemic.

While John Winter, CEO of the Australian Restructuring and Turnaround Association (ARITA) expects the government to reintroduce the one-year bankruptcy “for an interim period”, Chartered Accountants Australia and New Zealand (CA ANZ) has urged the government to abandon its plans, arguing that it’s a knee-jerk reaction to a possible increase in personal insolvencies as a result of the pandemic.

In its submission to the AttorneyGeneral’s Department, CA ANZ stated that the current economic circumstances shouldn’t be a trigger for change, but rather that “any change to the bankruptcy system

should be based on the merits of that change, not on the economic landscape at a given point in time”. “Reducing the default period to one year will damage the integrity of the financial system with bankruptcy becoming a more attractive option, be misused to defeat creditors and make credit harder to access for all,” CAANZ said. CAANZ isn’t the only one with doubts about changing the discharge period to one year. In its submission, the Personal Insolvency Professionals Association (PIPA) stated: “While there may be merit in setting a default period of one year for bankruptcy in certain circumstances, it is important to note that many of the consequences of bankruptcy will extend beyond the one-year timeframe and these consequences impact severely on sole traders’ and business partnerships’ ability to continue to trade. “We are not convinced that setting a one-year bankruptcy default period will stimulate business. The Emma Mos personal insolvency system already

“One-year bankruptcies have been widely discussed previously and were last proposed in December 2015, when the government introduced legislation to reduce the default bankruptcy period from three years down to just one year.”

has a remedy that, with some key adjustments, could achieve the outcome desired by the Government: this is a debt agreement,” PIPA stated.

While views on the merits or otherwise of the reduced bankruptcy period are mixed within the industry, many believe that the one-year discharge period could be good for first-time, good-faith bankruptcies – but that it should also mean the administration of the estate concludes at that time or soon after. “The shorter period would enable bankrupts to ‘fail fast’ and move forward, and it would enable Trustees to wind up the matter quickly, which could also be better for creditors,” said my colleague Chris Baskerville, QLD Partner and Bankruptcy Trustee.

It’s something that Jimmy Trpcevski, who heads our Perth division, WA Insolvency Solutions, agrees with. “The shorter discharge period would allow those individuals to move on more quickly with their lives, whether they’re an employee, business owner, or director,” Jimmy said. “As the economic climate has changed, there is a greater level of understanding as to the reasons why someone goes down this road. Awareness of the options and the education by the advisers and experienced practitioners gives comfort to individuals. I also believe many people would understand the mental health benefits and relief of moving on sooner.”

Will the shorter discharge period reduce the stigma?

Not according to CAANZ, which believes that reducing the default period to one year will do little to reduce the stigma for those who are declared bankrupt. It notes that the record of bankruptcy or a personal insolvency agreement is held in perpetuity on the National Personal Insolvency Index (NPII) and believes that public records on the NPII should be aligned with the period that a record is kept on a debtor’s credit file to reduce the stigma of bankruptcy.

Jimmy Trpcevski says that “everyone’s situation is different”. “The belief that there is stigma associated with Bankruptcy is more of a myth than a reality. Bankruptcies occur for a number of reasons, such as falling property prices, family disputes, marriage disputes, not getting paid for work done, or shortfalls on financed equipment. The reasons why people declare bankruptcy have evolved over time – and these days most people know someone who has gone through a bankruptcy, whereas previously, it was an anomaly.”

And my colleague Malcolm Howell, also a seasoned Bankruptcy Trustee based in Victoria, says there’s not a “one size fits all solution”.

While he believes the one-year bankruptcy will be good for some individuals, he also says it’s important to have the option of extending the bankruptcy beyond one year for certain circumstances – for example: — where the Bankruptcy Trustee suspects there’s fraudulent activity by the bankrupt. — where there has been noncompliance with a Trustee’s written directions or failure to disclose property, income or a liability. — where the bankrupt has provided the Trustee with false information about their affairs or has failed to provide the Trustee with information when requested. And he believes that for ‘repeat offenders’, the discharge period should also automatically be extended beyond one year, which would help deter personal insolvency phoenixing.

What most agree on, is that if the government does decide to introduce the one-year bankruptcy, there needs to be specific criteria for it to work effectively and prevent people abusing the regime.

“...if the government does decide to introduce the one-year bankruptcy, there needs to be specific criteria for it to work effectively and prevent people abusing the regime.”

The current lay of the land

While the debate continues and we wait for the government to release its findings and recommendations in response to the discussion paper, the number of personal insolvency appointments have fallen significantly. The government’s protection measures, not to mention stimulus measures and the ATO deferring debt recovery action, have been key drivers in Australia not experiencing the once much discussed “insolvency tsunami”.

There was a slight increase (0.9%) in the proportion of people entering a new personal insolvency in capital cities in the March 2021 quarter compared to the previous quarter. New personal insolvencies rose 7.2% in capital cities representing 61.1% of the national total in the March quarter, while outside of capital cities they rose 3.4%.

And while we are expecting the levels of personal – and corporate – insolvency to remain low for the rest of 2021, as the ATO ramps up its debt collection and household debt starts to rise, many are expecting insolvencies to increase to historically average levels.

With predictions that the numbers of personal insolvencies will rise, it’s more important than ever for individuals to take timely advice from a qualified expert.

*Emma Mos Principal, Jirsch Sutherland T: 1300 547 724 E: emmam@jirschsutherland.com.au