Building a better buggy whip? The Debt Agreement Reform legislation

On 7 December the Senate referred an exposure draft of the Bankruptcy Amendment (Debt Agreement Reform) Bill 2017 to its Legal and Constitutional Affairs Legislation Committee.

From their introduction in 1996, Part IX Debt Agreements have provided individuals with a low-cost alternative to bankruptcy.  Part of the cost saving structure was a mechanism that operated without the involvement of Bankruptcy Trustees, and it seems that it was originally anticipated that Debt Agreements would be implemented and managed by debtors themselves, their friends or relatives, or by not-for-profit financial counsellors.

In fact, commercial operators leapt into the vacuum, and a new industry was created.  Probably in part due to aggressive promotion by those commercial operators, as Michael Murray has identified, today Part IXs almost rival bankruptcy in popularity.

There was significant reform in 2007, with changes intended to adjust the regime to reflect the widespread involvement of commercial operators.  These latest reforms (draft legislation available here) some ten years later will further regulate those commercial operators, but there are other, significant changes.

Access to the Part IX process

Probably the most important change is a very significant expansion of access – the maximum asset limit will be doubled, to $223,350.

Restrictions on debtor contributions

Another significant change is the introduction of limits on debtor contributions, with a limit on the time frame over which payments can be made – 3 years – as well as a percentage limit (not yet set) referenced against the debtor’s income.  Those limits will apply to original proposals and any later variations.  The Official Receiver will also have a new power to reject proposals even within these limits if they would cause ‘undue hardship’ to the debtor – although this is to be used only in ‘exceptional circumstances.’

Alignment to bankruptcy

There are a number of changes that will align the regulation of Debt Agreement Administrators to the regulation of Bankruptcy Trustees.  Debt Agreement Administrators will be required to:

• Consider whether a debtor has committed any offences under the Bankruptcy Act and, if so, refer the matter to the appropriate authority.
• Follow the same funds handling procedures as Bankruptcy Trustees, with failure to constitute an offence.
• Maintain ‘proper books and records’ to the same standard as Bankruptcy Trustees, with failure to constitute an offence.
• Obtain and maintain appropriate professional indemnity insurance to the same level as Bankruptcy Trustees.
• Refrain from charging expenses to the debt agreement fund unless there is specific prior disclosure in the Debt Agreement.

The Inspector-General’s investigation and inquiry powers will be extended to encompass ‘any conduct of a Debt Agreement Administrator’ and the grounds on which the IG can issue a ‘show cause’ notice – seeking a written justification of continued registration – will also be expanded.

Brokers, referrers, and conflicts of interest 

The explanatory memorandum refers to concerns that ‘an unscrupulous administrator is in a position to exploit a debtor’s lack of knowledge,’ and several measures appear intended to address this:

• Proposed Administrators will be required to disclose broker or referrer information to the debtor, and creditors.
• The Debt Agreement Administrator and related entities will be unable to vote on the acceptance of the proposal, or any resolution to modify or terminate the debt agreement.
• It will be an offence for a Debt Agreement Administrator to provides creditors with an incentive to vote in a certain way.
• Debtors will be able to seek termination of the debt agreement where an administrator has committed a breach of duty.

Professionals only!

The industry will be fully professionalised – only a registered Debt Agreement Administrator or registered Bankruptcy Trustee will be able to administer a debt agreement – but this is really only a symbolic change, because in practice these are the only parties who do such work now.

A better buggy whip?

The changes impose additional work on Debt Agreement Administrators, most notably the requirement to investigate and report offences.  That additional work will probably translate to additional costs, which will be charged to the deed fund and ultimately be borne by creditors.  Whilst that represents a shift away from the low cost objective that led to the introduction of Part IX, it is otherwise hard to argue against changes which do no more than align to the standards currently imposed on Bankruptcy Trustees.

But however worthwhile the changes are, they may have limited practical impact.  If the one-year bankruptcy discussed here is implemented then it is hard to see why many debtors would bother with a Debt Agreement.  It seems likely that the unscrupulous ‘non-mainstream advisers’ will tell their clients that they can simply ignore any efforts that a bankruptcy trustee will make to assess and collect income contributions in years two and three  – which means that a twelve month bankruptcy will be not only far quicker but also far ‘cheaper’ than a three-year debt agreement.

Submissions

The committee is seeking submissions by 16 February to gather stakeholder feedback on ‘issues of concern’ and to allow the committee ‘to consider expert views on impacts,’ and is due to report by 19 March 2018.

Update:  The first (and only, at the date of writing) submission to the inquiry, by Vivien Chen, Lucinda O’Brien and Ian Ramsay, provides a link to their thoughtful & structured analysis on insolvency reform. ‘An Evaluation of Debt Agreements in Australia’, available here.