Detoured? One year bankruptcy referred to committee

In one sense it is surprising that the Senate referred the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 to Committee on 30 November 2017.  The tiny Bill (only ten pages long) really only contains one measure – shortening the statutory bankruptcy period from three years to one year – which presumably Senators either support, or not.  But the legislation was tabled in Parliament without any prior consultation, and so consultation now via the committee process is welcome, and appropriate.

The reduction in the bankruptcy period means that unless an objection is lodged, bankruptcy will end after twelve months.  Individual debtors will then again be able to act as a director of a company, travel overseas, and incur credit without having to disclose bankruptcy.  Significantly though, they will remain subject to the income contribution regime for three years, as is now the case.

The legislation implements the final phase of the 2016 National Innovation Agenda – improving Australia’s bankruptcy and insolvency laws proposals paper, discussed here, intended to promote entrepreneurship by reducing the penalty and stigma associated with business failure.  Notably, despite being intended to reduce stigma associated with business failure, the shorter term will apply to all bankrupts – not just the circa 16% (per the September 2017 quarter statistics) who are business bankrupts.

The major criticisms of the changes are:

• It will make bankruptcy ‘too easy’ – Debtors may be tempted to incur additional credit to update household items or take a holiday, knowing they can declare bankruptcy rather than repay.  Notably, there are no anti-abuse mechanisms to limit access to the shorter period – for example to first time bankrupts only.
• Trustees will not have enough time to properly investigate a bankrupt’s affairs and file an objection to extend bankruptcy, before the twelve months expires.
• Collecting contributions after bankruptcy has ended will be more difficult and more expensive.  In practical terms the ‘threat’ of an objection is a simple and inexpensive leverage point for trustees to calculate and collect income contributions.
• There is no grandfathering – perhaps surprisingly, bankruptcies on foot at the commencement date will be shortened to the twelve month term – and so the changes will have retrospective effect.

The deadline for submissions to the inquiry is 31 January 2018.

An earlier post on this topic: Shortening Bankruptcy

Comment on the draft legislation is here and a copy of my submission is here.

For my commentary on the Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, also referred to the Senate Standing Committees on Legal and Constitutional Affairs, see here.