Shortening Bankruptcy

Bankruptcy reform legislation, available here,  was today tabled in Federal Parliament – notably without the prior release of an exposure draft.

The legislation addresses the second and last part of the reforms outlined in the 29 April 2016 National Innovation Agenda – improving Australia’s bankruptcy and insolvency laws proposals paper, discussed here.

The headline measure is a two-year reduction in the period for which a person is ordinarily bankrupt.

Currently an individual debtor will be bankrupt for a three year period, which can be extended by two or five years (depending on the severity of the ‘wrongdoing’)  if the trustee lodges an ‘objection to discharge:’ a total of five or eight years.

The reform will shorten the initial term to one year, however the objection increments will increase by two years, to four and seven years.  In other words, the current extended five and eight year period arising where an objection is lodged, will be maintained.

The reduction in term is perhaps not as significant as it first sounds.  True, debtors will be able to travel overseas, be appointed as company directors, and incur credit when the twelve month period expires.  However, they will still need to provide information to the trustee and pay any income contributions for three years (or five or eight years, if an objection is lodged) just as they do now.  For that reason, in many cases the end of the bankruptcy period will not means the end of interactions with their trustee.

The changes will present challenges to trustees:

• They will need to accelerate their investigations to ensure that if appropriate they can lodge an objection to discharge in that initial twelve month period, or they will miss the opportunity forever.
• They will need to obtain information and secure payment of post-bankruptcy income contributions without the benefit of the objection-to-discharge regime – which currently provides a simple and inexpensive administrative point of leverage.

Perhaps most affected by the reforms will be those businesses that promote and administer ‘Debt Agreements’.  Debt agreements were introduced in December 1996 to provide a simpler and lower cost alternative to bankruptcy, for debtors whose income and assets did not justify the costs of a ‘Personal Insolvency Agreement.’  Their use has grown in the twenty years since then: in 2016 more than 12,000 debtors took the debt agreement option. With bankruptcy cut to just one year, it seems likely that many debtors will decide that bankruptcy is an easier and cheaper alternative to a debt agreement.

There is one aspect of the reforms that will surprise many: the one year term will apply to bankruptcies on foot at the commencement date.  As a result, the changes will be retrospective, to the advantage of individual debtors.  The decision to make the change retrospective provides a clear contrast to the approach taken with the ipso facto reforms in the first phase, which were not retrospective, to the disadvantage of corporate debtors.