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Tuesday, 18 September 2001
Page: 30875

Mr WILLIAMS (Attorney-General) (5:35 PM) —In summing up this debate, I propose to refer both to the second reading motion moved by the member for Barton and to the subject of the debate on the bill proper. The government does not support the amendment to the second reading motion proposed by the member for Barton. The member claimed that the introduction of the new tax system has caused a significant increase in the number of bankruptcies, and he quoted statistics from Dun and Bradstreet that bankruptcies for the June 2001 quarter are 32 per cent higher than for the corresponding quarter in 2000. The member for Hunter made the same claim.

It is oft said that there are lies, damned lies and statistics, and perhaps we should add a fourth category: statistics quoted by the opposition which would be beyond even the standard view of statistics. Labor is always quick to selectively quote statistics, but its claims only deserve to be taken seriously if the comparisons made are meaningful. The member for Barton neglected to mention that the number of new bankruptcies rose only marginally from 23,298 to 23,907 over the financial year—a rise of only 2.6 per cent. If the GST were to blame for increased personal bankruptcies, you would expect the 2000-01 figures to be higher than in any recent year. The truth is that the 2000-01 figures remain significantly lower than those registered two years ago. Total business related personal bankruptcies have increased by nine per cent in the 2000-01 financial year when compared with the 1999-2000 financial year, rather than the 177 per cent quoted by the member for Barton. However, business related personal bankruptcies in 2000-01 are 12 per cent lower than for the 1998-99 financial year. This comparison shows that a single-year comparison does not necessarily give any accurate reflection of a trend.

The member for Barton mentioned that he was quoting evidence from experts at the coalface. However, information available to the Insolvency and Trustee Service of Australia, where all new bankruptcies are registered, suggests that the GST has had no significant impact on people becoming bankrupt. In the almost 14,000 bankruptcies in the six months to 30 June 2001, the GST was mentioned as a cause of bankruptcy on only 35 occasions. For instance, ITSA officers have reported only eight mentions of the GST on statements of affairs in New South Wales, 15 in Queensland, four in Victoria, two in South Australia and six in Western Australia. In addition, only 1,696 of the business bankrupts attributed the cause of their bankruptcy to economic conditions during the 2000-01 financial year.

Other professionals in the industry have also downplayed the impact of the GST on insolvencies. The then president of the Insolvency Practitioners Association of Australia, Mr Stephen Parbery, was quoted in the Australian Financial Review of 12 June 2001 as saying that he had not seen one business failure yet as a result of the GST. It is also significant to note that the majority of new bankruptcies continue to be in the non-business consumer credit area. Business bankruptcies represented only 18.6 per cent of bankruptcies in the 2000-01 financial year.

Parts 3 and 4 of the amendment moved by the member for Barton condemn the government for failing to act to stop tax avoidance. However, this reform package does contain measures to address community concerns about those who use bankruptcy to avoid their tax liabilities. The Bankruptcy Legislation Amendment Bill 2001 is not primarily directed at the issue of abuse of the bankruptcy laws by high income bankrupts such as barristers and other professionals, but it does do so in one significant respect. Section 153B of the Bankruptcy Act 1966 currently permits the court to annul a bankruptcy if the petition ought not to have been either presented or accepted. Item 156 of this bill makes clear that the court may annul a debtor's petition for bankruptcy whether or not the bankrupt was insolvent when the petition was presented. Therefore, on application by a creditor such as the Australian Taxation Office, the court might annul the bankruptcy of a high income professional who technically is insolvent but who could have chosen to meet unpaid taxation obligations.

More broadly, in March this year the Assistant Treasurer and I established a task force to report to ministers on whether any changes are needed to the bankruptcy and taxation laws to ensure that the bankruptcy law cannot be used to avoid tax obligations. The task force includes representatives from the Attorney-General's Department, the Insolvency and Trustee Service of Australia, the Australian Taxation Office and Treasury. It will consult with the Australian Federal Police and the Director of Public Prosecutions and report shortly about the best way to address community concerns about such bankruptcies.

Bankruptcy is designed to give people in severe financial difficulty relief as a measure of last resort from overwhelming debts. Bankruptcies have trebled in the decade until the 1997-98 financial year and have remained at high levels since then. Almost all of the increase has been in the non-business consumer bankrupt category. Clearly, greater numbers of consumer debtors are choosing bankruptcy as a way of resolving their financial problems. The government is concerned to ensure as far as possible that these people are properly informed when making such an important decision as entering into bankruptcy.

The Bankruptcy Legislation Amendment Bill 2001 and the Bankruptcy (Estate Charges) Amendment Bill 2001 will amend Australia's bankruptcy laws to address concerns that bankruptcy is too easy, and to better balance the interests of debtors and creditors. The reforms contained in these bills are designed to encourage people contemplating bankruptcy to consider the seriousness of the step they are about to take and to consider alternatives to bankruptcy. They will also give creditors a better opportunity to negotiate with debtors after a bankruptcy petition is accepted but before bankruptcy takes effect.

The member for Barton asserted that there had been insufficient consultation with credit counsellors prior to the introduction of these bills. I am pleased to inform the member that the reforms proposed in the bills were developed following more than two years of consultation with various stakeholders in the personal insolvency field. In particular, there has been consultation with members of the Bankruptcy Reform Consultation Forum, a peak consultative body I established in 1996 to facilitate better consultation between the Insolvency and Trustee Service of Australia and key groups with a stake in the bankruptcy laws.

One member of the forum is the Australian Financial Counsellors and Credit Reference Agency. This agency represents precisely the financial counselling organisations which the member for Barton claims were not consulted. In addition, the proposals contained in this reform package have received wide community support, including from the Law Council of Australia and Credit Union Services Corporation Australia Ltd, the peak industry body for Australian credit unions.

The government also welcomes the report of the Senate Legal and Constitutional Legislation Committee into the bills. The committee has recognised that the proposed amendments will achieve the government's aim of preventing people using bankruptcy in a mischievous or improper way and of encouraging people who can or should avoid bankruptcy to consider other options. I thank the committee and its secretariat for its work in examining the bills. I am pleased that the committee recommended that the bills be passed, although I note that Labor senators opposed the proposed abolition of early discharge from bankruptcy—that is, for eligible bankrupts, discharge after six months—as Labor members have in the debate. I will return to this issue later.

Amendments contained in the bill will introduce a 30-day cooling-off period after the filing of most debtors' petitions before bankruptcy can occur. I note that one of the recommendations of the Senate Legal and Constitutional Legislation Committee was that the cooling-off period be reviewed after three years. The government agrees with this recommendation of the committee.

The members for Barton and Gellibrand criticised the proposed extension of the cooling-off period on the ground that it would have no practical effect. The government has proposed this amendment to allow debtors who have acted too hastily in petitioning for bankruptcy to reconsider their decision. Additionally, complaints to ITSA by small business creditors have indicated that currently they are given no chance to negotiate with their debtors to set up, for example, fresh repayment schedules or perhaps a consolidation loan. The first creditors are aware that the debtor is unable to pay is when they are presented with a notice from ITSA of the bankruptcy. The proposed amendments will afford creditors this opportunity to negotiate. These are the practical effects that the amendment is designed to achieve.

The reforms also propose to give the official receiver a discretion to reject debtors' petitions that are a blatant abuse of the bankruptcy system when it is clear that the debtor is solvent and has singled out one creditor for non-payment or where the debtor is a multiple bankrupt. The exercise of this discretion will be subject to external administrative review. The bill will strengthen the trustee's powers to object to the automatic discharge from bankruptcy of uncooperative bankrupts. The strengthening of the trustee's objection to discharge powers is directed at the intentional failure by a bankrupt to cooperate with his or her trustee and deliberate attempts by the bankrupt to impede the trustee's administration of the estate.

I foreshadow that I will be introducing amendments to the bill today to ensure that all trustees' objections to discharge will be reviewable. The bill currently allows reviews of all special ground objections except those filed on the special ground that the bankrupt has not paid to the trustee an assessed income contribution. This restriction was intended to ensure that bankrupts whose income allegedly comprised largely non-cash benefits from friends and family could not argue as a reasonable excuse for failing to pay a contribution assessment that they had no cash with which to pay it. However, it would also apply to a bankrupt who failed to pay a contribution assessment for a legitimate reason. A proposed amendment to the bill will remove this restriction on review.

The reforms contained in the bill relating to objection to discharge provisions will then overcome a deficiency in the present law which can encourage a bankrupt to cooperate with the trustee only at the last moment—that is, when a review hearing is imminent. Reforms contained in the bill will also confirm the court's power to annul a debtor's petition bankruptcy even if the debtor was insolvent when petitioning. This measure is directed at high income earners who have chosen to not pay a particular creditor—for example, the Australian Taxation Office—and then petition for bankruptcy to extinguish the debt. The bill makes clear that in such a situation the court would be able to annul the bankruptcy as an abuse of process despite the fact that the debtor technically was insolvent. The bill proposes to double the income threshold for debt agreements to $61,000 after tax, to encourage more people to consider the debt agreement option as an alternative to bankruptcy. The practical utility of debt agreements is restricted at present by the relatively low income threshold which applies. Doubling it will make the debt agreement alternative available to a much larger group of debtors.

Another major proposal contained in the bill, the repeal of the early discharge provisions, will address unfairness and anomalies in the early discharge arrangements and allay concerns that some debtors do not think seriously enough about the decision to declare themselves bankrupt. Labor's proposed amendment to retain the early discharge scheme while extending it from six months to two years will not address the inherent unfairness and anomalies in the scheme. We will oppose the proposed amendment. Claims by Labor that retaining early discharge would allow low income bankrupts to recover quickly miss the point. It is bankruptcy and not discharge, early or otherwise, which gives debtors relief from their creditors and the fresh start they need. The loss of access to credit is the most obvious impact of bankruptcy; and the names of all bankrupts, whether discharged or not, remain on the Credit Advantage database for seven years and on the ITSA public database permanently.

The members for Barton and Gellibrand claimed that there is insufficient evidence as to the need for abolition of early discharge. When early discharge was introduced by Labor in 1992, it was argued that keeping low income debtors bankrupt for three years served no useful purpose if their bankruptcy was due more to misfortune than misdeed, or unless it was commercially reprehensible behaviour. However, the qualifying criteria established by Labor have not been an adequate test of whether the bankruptcy indeed arose from misfortune rather than misdeed. Approximately 60 per cent of bankrupts are eligible for early discharge. There is no evidence to suggest that the remaining 40 per cent of bankruptcies were due to misdeed rather than misfortune. For example, a debtor with sufficient assets to pay a dividend or sufficient income to make a contribution is not intrinsically any less deserving of early discharge than a person with neither assets nor sufficient income to attract a contribution liability. At the same time, a bankrupt who has deliberately incurred debts with no capacity to pay them could quite easily qualify for early discharge, yet their conduct may well be described as misdeed or commercially reprehensible behaviour.

The current early discharge provisions are discriminatory in other ways. Where a bankrupt couple has joint debts, the male bankrupt will often get early discharge while the female, generally with a lower income than the male, may not be eligible for early discharge as she will fail the test requiring that her debts be not more than 150 per cent of her income. Early discharge has not worked as intended and, instead, undermines the credibility of the bankruptcy system. The repeal of the early discharge provisions will address unfairness and anomalies in the early discharge arrangements and remove a disincentive for debtors to consider options other than bankruptcy.

Other changes will streamline the administration of bankruptcies by trustees and improve the operation of the act. For example, the bill will further streamline meeting procedures, simplify the mechanism for changing trustees and allow the inspector general to examine the affairs of debt agreement administrators. I foreshadow that I will be introducing an amendment to the bill to correct an unintended consequence of an application provision. The bill proposes that the Inspector General in Bankruptcy may require a trustee who no longer has the ability, including knowledge, to perform satisfactorily the duties of a registered trustee to provide a written explanation why he or she should continue to be registered. The proposed amendment to the bill will ensure that the inspector general can require such an explanation from all trustees, not just trustees who are registered after the bill comes into effect.

The Bankruptcy (Estate Charges) Amendment Bill 2001 is the second and smaller bill in the government's bankruptcy reforms package. It will address anomalies in the way the realisations charge is applied, align charge periods with the financial year and close some charge avoidance opportunities. The reforms proposed by the two bills will amend Australia's bankruptcy laws to address concerns that bankruptcy is `too easy' and to better balance the interests of debtors and creditors. They will encourage people contemplating bankruptcy to consider alternatives to bankruptcy. By restoring fairness to the bankruptcy system, we will promote confidence in it. I commend the bill to the House.

Amendment negatived.

Original question resolved in the affirmative.

Bill read a second time.