Back where we started? Director disqualification

Last week the Senate Standing Committee on Legal and Constitutional Affairs conducted joint hearings into two separate pieces of personal insolvency legislation.  One Bill (discussed here) is intended to implement Debt Agreement Reform and align the regulation of Debt Agreement Administrators to the regulation of bankruptcy trustees, the other will shorten the default bankruptcy term to one year.

Reducing the bankruptcy term to twelve months will implement the second and last stage of the 2016 National Innovation Agenda – improving Australia’s bankruptcy and insolvency laws program (the first stage was the Safe Harbour and ipso facto reform legislation, discussed here).

According to the original proposal paper the one-year bankruptcy measure is intended to promote entrepreneurship by reducing the penalty and stigma associated with business failure.

Notably, although the bankruptcy term will be reduced to one year the income contribution regime will continue to apply for three years – presumably reflecting an intention to maintain returns for creditors.  However, as discussed in Q: How does a 3 year contribution regime fit into a 1 year bankruptcy? A: badly in practical terms a bankruptcy trustee will have very limited options to deal with a former bankrupt who ignores requests for information about his or her income, and so it is likely that a one year term will reduce returns to creditors.

Government submissions on the Government proposals

It seems that there are other concerns.   The Australian Criminal Intelligence Commission made a submission which referred to intelligence suggesting:

“reducing the default bankruptcy period from three years to one year may increase the potential for serious and organised crime groups to exploit bankruptcy provisions for their own advantage.”

ASIC also made a submission expressing concern about what it described as the ‘possible unintended consequences’ of the proposed changes.  It seems that the measures identified in the original proposals paper as a problematic ‘penalty and stigma’ are measures that the corporate regulator regards as sound policy, intended to keep an unsuitable person away from the ‘controls’ of a company, as well as to provide a deterrent effect.

ASIC told the inquiry that their enforcement activity took into account the fact that bankruptcy triggered an automatic three year director disqualification.  They said that if the ‘automatic’ disqualification was reduced to only one year then they might need to take more active steps to seek longer disqualifications, and might ask Parliament to amend the Corporations Act ‘to extend the period of automatic disqualification where the person is an undischarged bankrupt.’

Right back to where we started from?

ASIC provided more detail at the Sydney hearing (the transcript is here).  They propose that:

• A person who becomes bankrupt should be unable to act as the sole director of a company for three years.
• There should an extended disqualification period for ‘egregious conduct.’  It was not clear whether this would apply only to bankrupt directors, or to all directors.
• Automatic disqualification should be applied to those involved in ‘repeat conduct’ – four corporate failures in seven years.  Again, it was not clear whether this measure would relate to all directors or only bankrupt directors.

Implementation of the ASIC proposals would reverse some of the effects of the proposed bankruptcy changes.  The net result would be measures that are a little more targeted, but some would argue that the overall outcome would be close to the position as it is today: back where we started from.