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Thursday, 30 May 2002
Page: 2816

Mr McCLELLAND (9:58 AM) —We will be moving a second reading amendment which I will describe in the course of this debate on the Bankruptcy Legislation Amendment Bill 2002. Essentially, while not declining to give this bill a second reading, we will be making the point that we think the emphasis of the government has been too much towards the big end of town, with little concern for those who are actually struggling under the greater debt burdens that tend to be in society these days and, indeed, tend to have been aggravated as a result of the imposition of the goods and services tax. The first bill, the Bankruptcy Legislation Amendment Bill and, indeed, the Bankruptcy (Estate Charges) Amendment Bill 2002 were introduced into the House on 21 March this year. Previous bills substantially similar to these bills were introduced during the last parliament, and lapsed when the election was called.

In introducing the bills, the Attorney-General stated that bankruptcy had been devised `as a shield that might be used, in the last resort, by an impecunious debtor to seek relief from his or her overwhelming debts'. He said:

Over the years, some unscrupulous debtors have learned to use bankruptcy as a sword to defeat the legitimate claims of their creditors.

We have seen, indeed, in recent times some very high profile bankrupts in the case of some barristers, for instance, who have failed to pay their taxation obligations for a number of years and then have avoided those obligations by the means of bankruptcy. We agreed that steps need to be taken to prevent that sort of thing occurring. For that reason we will be supporting the essential thrust of these amendments, but I will express our concerns as we go through the discussion. Towards the end of the speech I will indicate our concern that more steps could have been taken to prevent rorts of the system, of the bankruptcy provisions, by the top end of town, in particular with respect to part X arrangements. We say that that should have really been the focus of this legislative response, as opposed to much of this reform that is aimed at those poorer ends of the economic spectrum, those who are more likely to become bankrupt as a result of consumer debts.

The last major overhaul of bankruptcy was in 1996. The government, shortly after coming into office, introduced legislation that, in turn, was substantially based on Labor's 1995 bill and incorporated amendments by the Senate recommended by the Senate Legal and Constitutional Legislation Committee in September 1995. This bill that we are debating today does a number of things. It gives the Official Receiver a discretion to reject a debtor's petition where it appears that, within a reasonable time, the debtor could pay all the debts listed in the debtor's statement of affairs and that the debtor's petition is an abuse of the bankruptcy system. It also abolishes early discharge from bankruptcy. It will make it easier for trustees to lodge objections to a person's discharge from bankruptcy and harder for bankrupts to sustain challenges to objections. It clarifies that a bankruptcy can be annulled by the court, whether or not the bankrupt was insolvent when a debtor's petition for bankruptcy was accepted. It doubles the current income thresholds for debt agreements to allow and encourage many more debtors to choose this particular alternative to bankruptcy.

Other changes proposed by the bill streamline the operation of the act or are as a consequence of the Insolvency and Trustee Service Australia having become an executive agency. Those changes of a technical nature we support. The 2002 bill drops a measure previously included in the 2001 bill which would have introduced, in relation to most debtors, a mandatory 30-day cooling off period under which the debtor may have withdrawn the petition within 30 days of the official receiver accepting it. That measure in particular was heavily criticised as it would have lengthened the period of harassment that can actually be faced by bankrupts in very vulnerable circumstances from creditors and debt collectors, without showing any appreciable benefit for creditors. So we are pleased to have seen that provision removed from the bill. The Bankruptcy (Estate Charges) Amendment Bill 2002 amends the Bankruptcy (Estate Charges) Act 1997. Though the nature of those amendments was outlined by the Attorney-General in his second reading speech, they are essentially technical and facilitative in nature. Labor will support those amendments.

While Labor supports the need for bankruptcy reform, there are a number of aspects which are less than satisfactory which I now wish to touch on. Firstly, we are concerned that the consultation was not as broad as it should have been. Those concerns were expressed during the Senate committee hearing on these bills. In particular, in drawing up the reforms, the government paid little attention to those organisations that most closely represent the interests of those people for whom the bankruptcy legislation exists—that is, low income people.

When somebody comes to the realisation that they cannot meet their debt payments, it may be that they have too many credit cards and they cannot cope with the financial situation in which they find themselves. Indeed, there is often a cycle of using one credit card to pay for another credit card until it just completely blows out of control. One of the first people they see to obtain assistance in consolidating their debts so that they start eating into them is a financial counsellor. These people are literally at the coalface of personal insolvency. Often, by visiting a financial counsellor, it is possible to provide people with assistance to budget their way out of the debt and at other times they can obtain advice regarding the bankruptcy procedures.

We would have thought that, in framing personal insolvency laws, one of the most important groups of people to listen to would have been these financial counsellors, but we note with concern the comments by the Wesley Community Legal Service, for instance, when they expressed the view during the Senate committee hearings that `financial counselling organisations were not properly consulted'. They said that `proper consultation with interested and relevant community based welfare organisations did not occur but rather lip service was paid to a few select organisations'.

The detailed provisions of the bill, which are targeted more at the low income bankrupts who are in over their heads rather than at the bankrupt barristers who I referred to, reflect the lack of interest in the experience of financial counsellors. As the Wesley Community Legal Service submitted, the bill will disadvantage many of the poor in society and their families while debt collectors stand to gain. We think this is really quite an indictment of the government, which has professed to govern for all Australians but instead has been caught time and again getting stuck into those people who have difficulty in standing up for themselves.

In terms of our concerns regarding certain provisions, the first is in respect of early discharge. The bill proposes to abolish the provisions currently contained in the act which allow early discharge for low income bankrupts. The first point to make is that those who will be affected by this measure will be among the most vulnerable in our society. Therefore, you would think that the government should present compelling evidence as to why it is necessary for the good operation of bankruptcy law in this country that the provisions be abolished. The government has not made a convincing case at all for the abolition of early discharge.

Administrative early discharge provisions were introduced in 1992 in response to concerns that low income earners did not have any real capacity to avail themselves of the existing early discharge provisions that required an application to the Federal Court. At that time only a very small proportion of bankrupts availed themselves of the early discharge provisions because of the costs involved in making an application to the court. In almost all cases where early discharge was sought, the order was in fact granted. In respect of the early discharge provisions, in his tabled second reading speech on 22 August 1995, then Senator McMullan gave his reasons, and I quote:

Commonly, persons who succeed in obtaining orders for discharge have become bankrupt as a result of failed business activities, and seek early discharge so as to enable them to resume such activities. These are usually also persons who have the capacity to contribute to the estate from income, but do not do so. The proposals in the Bill will restore equity to the operation of the early discharge system, and the eligibility and disqualification criteria are designed to ensure that where a person has become a bankrupt because of commercial culpability, he or she is disqualified from early discharge.

Under the current early discharge provisions, a bankrupt may apply for early discharge after 6 months from the time when he or she files a statement of affairs with the Registrar.

It is important to note that there are restrictions on the eligibility criteria for this early discharge: firstly, that there has to be a determination that the bankrupt has no or insufficient divisible property to enable a dividend to be paid to creditors; secondly, that the bankrupt has not disposed of property in a transaction that is void against the trustee; and, thirdly, that the bankrupt earns an income that is less than the actual income threshold amount applicable to him or her at the time the application for early discharge is made—that is, that they are not at a level where income would actually be distributed during the course of the bankruptcy to creditors. Disqualifying criteria are also significant. They include: firstly, that the bankrupt has previously been bankrupt—that is significant; secondly, that the unsecured liabilities of the bankrupt exceed 150 per cent of his or her income in the year prior to the date of bankruptcy; thirdly, that more than 50 per cent of the bankrupt's unsecured liabilities are attributable to the conduct by the bankrupt of business activities; and, finally, that the bankrupt has given false or misleading information about his or her assets, liabilities or incomes.

Going through those criteria we see that they are quite strict and indeed very much focus on low-income earners and only, importantly, in respect of the first bankruptcy. Early discharge is not available in respect of second and subsequent bankruptcies. There is no evidence that these provisions are being abused. Public hearings by the Senate Legal and Constitutional Committee into the bills were characterised by a complete lack of evidence as to the need for the abolition of the early discharge provisions. Indeed, Mr Donald Costello, the acting adviser to ITSA, provided evidence to the committee on the policies underlying the proposed changes, and summed this up when he said:

There are no statistics which would be available to help make a decision as to whether or not early discharge is an appropriate regime to have. All we can provide is feedback from Credit Union Services Corporation of Australia Ltd, which is a significant lending group representing a substantial number of credit unions, plus persistent correspondence from mainly small business creditors over the years who say that it is too easy for people to walk away from their debts.

We are concerned that the government too readily accepted those broad arguments without a more detailed analysis of the facts. We think that there is a chance that in adopting these measures the government is actually scapegoating those who, as a result of struggling times, become bankrupt rather than looking at the underlying causes of their difficulties. Accordingly, the key feature of the early discharge provisions is that they were designed to deal with the increasing number of consumer bankruptcies which were due more to misfortune than misdeed. Indeed, we see now that the explosion in credit card debt in addition to the burden imposed by high mortgages resulting from the dramatic increase in property values in Australia is imposing tremendous burdens on Australian families. I think statistics show that the level of household debt is now about 119 per cent. That is, people owe about one-fifth more than they are bringing in. That is a significant concern that could face many Australians, particularly if there is a rise in interest rates. Regrettably, it will be inevitable that we will see a surge in bankruptcies if there is a significant rise. Concern within the community regarding any potential increase in interest rates is very profound.

We say the error of the government's approach is that instead of recognising that their policies have forced greater financial hardship on individuals and small businesses—in particular we refer to the GST—they are actually targeting these people. The Attorney-General said almost as much when introducing the bill when he said that the provisions were targeted at a new category of bankrupt—consumer debtors with low asset backing who have overextended and then cannot repay their debts. Many believe that bankruptcy in this group is due more to lack of financial responsibility than to misfortune. We believe that is a harsh comment in terms of those who are at the most vulnerable end of the socioeconomic scale. The government, rather than getting stuck into them, should be looking at things such as financial counselling and the burdens of policies imposed on, in particular, families who have very low levels of income.

We do not support these measures. We believe that an appropriate balance, to prevent people from going too easily into bankruptcy but permitting them to try and get their lives in order, is to move an amendment which will allow an application for early discharge to be made after two years. The proposal will create a greater incentive for potential bankrupts to enter into alternative arrangements, such as debt agreements. We believe it more appropriately reflects a balance between the two competing policies.

The second area of concern is the incurring of debts within two years prior to bankruptcy. The bill seeks to amend section 265 subsection 8 of the act, which essentially provides that if a person contracts a debt of an amount of $500 or more without having, at the time of contracting it, `reasonable or probable ground or expectation' of being able to pay the debt then such a person is guilty of an offence which is actually punishable by imprisonment for a period not exceeding one year. We say that to remove that particular threshold is particularly harsh. The government's argument is that the section enables rorting: people could go on a serial spending spree purchasing a number of smaller items, nonetheless running up a total of more than $500 and therefore equally offending the principles contained in the section. However, we have to realise that we are not talking about corporations here. The government's other argument is that it brings it into line with the Corporations Law. We are very much talking about individuals, particularly if they have a family. There may be some requirement to pay a bond to get a roof over the head of the family. There may be an illness that confronts the family or someone needing a cap on a tooth or kids needing braces. All these things are essential costs. It is harsh in the extreme to have in the 21st century a provision in the statute books which would enable a person who incurred such as an expense to be jailed.

We therefore propose that a proviso be included in that section whereby a person cannot be prosecuted for incurring a debt in excess of a reasonable or necessary personal or household expense without any reasonable ground of expectation of them being able to pay that debt. So the inclusion of `necessary personal or household expense' picks up those points that I made earlier.

The third area of concern is in respect of the offence of contributing to insolvency by gambling in the two-year period prior to bankruptcy. Certainly we are aware that gambling can cause financial devastation for individuals and families. It is something that the community needs to come to terms with, particularly in terms of the proliferation of poker machines. Effectively, section 271 of the act retrospectively criminalises gambling. The difficulty with that section, however, is that problem gamblers are not aware, and could not be expected to know, that their habit is going to be such that it is going to lead them to financial devastation. Indeed, it may well be a disincentive to problem gamblers obtaining advice before declaring bankruptcy in the fear that they could actually face these penalties. Again, imprisonment could be a penalty arising from a prosecution under this section. There are suggestions that the fear of imprisonment has actually contributed, in the more distressing cases and in the overall stress of the predicament, to those who have become insolvent as a result of bankruptcy committing suicide.

So these are things that we have got to come to terms with. We do need a response as a community to the tremendous problem of gambling that is ever increasing in the community, but to impose these penalties, including the penalty of imprisonment, is literally ham-fisted, overdone and not an appropriate comprehensive response to that problem which exists in the community.

The final provisions go to the issues that I raised in respect of the operation of part X of the act. These provisions very much apply to those, I think is it fair to say, who are more at the big end of town—those who have had substantial assets. We are concerned that the proposals put forward by the government do not address the loopholes referred to in part X of the act, and indeed we note that there has also been some debate in the media about these provisions being abused or rorted. Part X provides for three alternatives to bankruptcy: entering into a deed of assignment, entering into a deed of arrangement or entering into a composition with creditors. We recognise that these provisions are important because, if properly used, they often result in debtors receiving more than they would have received if the person simply became a bankrupt. But ITSA itself has recognised that these provisions are generally used by higher-income earners and people in business who are able to offer their assets or payment from income to creditors.

Part X has generally been seen as a useful mechanism for bringing debtors and creditors together to work out arrangements that may result in a more superior outcome for all parties than the bankruptcy of the debtor. Nevertheless, over the years it has become clear that the procedure is open to abuse, and some legislative amendments have been proposed. Indeed, in 1987 there was a Law Reform Commission report on these perceived defects. It included four principal points. The first point was to prevent the use of these provisions where debtors have given misleading or inadequate information to creditors regarding their actual financial circumstances. The second point dealt with controlling trustees convening meetings in obscure places and not giving sufficient notice of meetings. Indeed, I recall there was also an issue regarding trustees being required to be at arm's length from the actual debtor.

The third issue is debtors stacking meetings with persons who purport to exercise voting rights in favour of the debtor. Indeed, there have been some instances in the past where there was evidence that the debtor had incurred debts to family members for the purpose of those family members effectively stacking the meeting and voting in the interests of the debtor rather than other creditors. Finally, there are the concerns about conducting meetings without an impartial chairman—coming back to someone who may have been, for instance, a professional adviser to the debtor. These are measures that we think need to be addressed. We have done quite some work in coming up with amendments that we think will address these provisions and we have put them forward in a constructive spirit and hope the government takes on board those provisions. Using the expertise of the department may well enable the refinement of those propositions which we have made. As I have indicated, we will be moving a number of amendments to address the weaknesses that I have referred to, including those provisions to part X. I move:

That all words after “That” be omitted with a view to substituting the following words:

“whilst not declining to give the bill a second reading, the House condemns the government for introducing bankruptcy reforms which crack down on low income bankrupts while leaving loopholes for the rich to exploit”.

The DEPUTY SPEAKER (Hon. I.R. Causley)—Is the amendment seconded?

Mr Quick —I second the amendment.

The DEPUTY SPEAKER —The question now is that the words proposed to be omitted stand part of the question.