Today the Senate Standing Committee on Legal and Constitutional Affairs issued reports about two separate bills, both intended to reform personal insolvency regimes.
Debt Agreement Reform
Importantly, the Bankruptcy Amendment (Debt Agreement Reform) Bill 2017 (discussed in more detail here) will strengthen the regulation of Debt Agreement Administrators, more closely aligning it to the regulation of bankruptcy trustees.
Another, seemingly less well understood aspect will limit the length of payment arrangements to three years. It is a well intentioned measure, but there is a risk that in practice it will operate to restrict a debtor’s ability to negotiate a Debt Agreement, because many creditors will not vote for a proposal unless it meets a minimum return requirement.
In the Inquiry hearings, one Debt Agreement Administrator referenced a minimum return requirement of 60 cents in the dollar. Using this as an example, a DAA would tell an debtor with liabilities of $70,000 that they need to create a fund of $42,000. A debtor with capacity to contribute $2,000 per month would be able to do this in 21 months – within the proposed three year limit, but a debtor who could only contribute $1,000 per month would need 42 months – outside the three year limit.
It may be that creditors will reduce their minimum return requirements, but if they do not, a measure presumably intended to offer debtors relief may operate in practice to stop some of them from entering into a Debt Agreement at all.
One Year Bankruptcy
The Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (discussed in more detail here) will shorten the default bankruptcy term from three years to one year.
The proposal echoes a previous initiative which allowed some bankrupts to apply for discharge after six months. That measure was scrapped in 2001 due to concerns that early discharge did ‘not reflect the serious nature of the decision to become bankrupt’ and that an ‘easy way out’ acted to ‘discourage debtors from trying to enter formal or informal arrangements with their creditors to settle debts.’
The Government proposes to maintain the current three year term of the income contribution regime – ie two years post-bankruptcy – but will leave trustees without any practical measures to collect information about a debtor’s income in the two years after discharge. Without that information the trustee will be unable to calculate income contributions, none will be collected, and so returns to creditors will diminish.
The Report
The report (available here) does recognise that these issues, and others, were raised in the various submissions – but gives higher weighting to the original policy intentions. The committee recommended:
- that the Government give positive consideration to ASIC greater scope to impose director disqualifications, discussed in more detail here.
- that the government consider amending the debt agreement reforms to allow debt agreements implemented under a three year cap to be extended by up to two years, by agreement.
- identification of a range of specific factors that should be taken into account when setting a maximum payment to income ratio for a debt agreement.
- that with those adjustments made, the legislation should be passed.
Other posts about the Bankruptcy and Debt Agreement reforms:
- Back where we started? Director disqualification
- Submission to the Legal & Constitutional Affairs Legislation Committee Inquiry into the Bankruptcy Amendment (Enterprise Incentives) Bill 2017
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Q: How does a 3 year contribution regime fit into a 1 year bankruptcy? A: badly
- Building a better buggy whip? The Debt Agreement Reform legislation
- Detoured? One year bankruptcy referred to committee
- Shortening Bankruptcy
- The National Innovation Agenda – improving Australia’s bankruptcy and insolvency laws
Australian Loan Restructuring Issues 