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Wednesday, 30 May 1984
Page: 2157

Senator GARETH EVANS (Attorney-General)(4.05) —I move:

That the Bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

Leave granted.

The speech read as follows-

This Bill introduces a range of significant amendments to the Bankruptcy Act 1966. One group of amendments is consequent upon a review of the operation of the Act. This review, of a detailed and technical nature, commenced under the previous Government and has been completed by this Government. Secondly, the Bill contains a number of amendments flowing from the Government's policy decision to reverse the previous Government's legislative implementation of the Review of Commonwealth Functions in this area.

I would like to outline, for the benefit of honourable senators, the administrative and legislative context in which the Bill has been prepared, and some of the principal amendments proposed. A detailed description of the provisions of the Bill appears in the Explanatory Memorandum which has been circulated to honourable senators for information.

Review of the Bankruptcy Act 1966

In the past two decades a number of countries which have insolvency legislation of similar derivation to our own Bankruptcy Act have embarked upon a review of their legislation. In Australia there have been two major reports, the Clyne Committee Report (''Report of the Committee appointed by the Attorney-General of the Commonwealth of Australia on 23 February 1956 to Review the Bankruptcy Law of the Commonwealth'') in 1962 and the sixth Report of the Law Reform Commission (''Insolvency: The Regular Payment of Debts''). The former report eventually led to the passage of the Bankruptcy Act 1966. The Government has approved the preparation of draft legislation, along the lines of that recommended by the Law Reform Commission, for exposure for public comment. I shall be making a statement on that matter in the next few days. However the need for a thorough review of insolvency law in this country has been apparent for some time. Accordingly, in 1983, I issued a reference to the Law Reform Commission to report generally on insolvency law.

Other countries have carried out similar, in-depth reviews. In England, the Report of the Insolvency Law Review Committee (the Cork Committee) was delivered in 1981. In the Republic of Ireland, the Report of the Bankruptcy Law Committee (the Budd Committee) reported in 1972. Other reports on company insolvency or bankruptcy have been submitted in New Zealand, Scotland, Canada and Ghana in the last two decades.

Consequently, it can be seen that we are experiencing a time of transition in this field of law. The amendments proposed in the Bill presently before the Senate are intended to address some of the problem areas in this field. A more thoroughgoing review of the law must await the report of the Law Reform Commission. Obviously this is some years in the future. The amendments proposed in the Bill may be grouped into the following categories:

removal of Anomalies;

enhancement of the special protection accorded to Maintenance creditors;

improving the administration of the Act;

achieving greater uniformity with corresponding provisions of the Companies Act 1981; and

reversal of the Review of Commonwealth Functions (RCF) decision in this area.

Removal of Anomalies

The Bankruptcy Amendment Act 1980 (Act No. 12 of 1980) created the Common Investment Fund. Essentially, this fund comprises the proceeds of the realisation of assets by the Official Trustee in Bankruptcy. At any point in time it is a large sum of money, usually of the order of $12 million to $13 million. This money is invested and, subject to the provisions of sec 20J, interest earned by the Fund is paid to Consolidated Revenue. Sec 20J provides for interest to be paid to a bankrupt estate or some other person entitled to moneys in the Fund, in certain circumstances.

This Fund was a new initiative. Experience has revealed some shortcomings in two of the sections of the Act dealing with the Fund, sec 20B and sec 20H. Amendments to these sections are proposed by cl. 9 and cl. 10 respectively of the Bill before honourable senators.

Similarly, time and judicial decisions have exposed flaws in other provisions of the Act. Thus, cl. 26 proposes an amendment to sec. 125 of the Act to ensure that the control which can be exercised by the trustee over bank accounts of an undischarged bankrupt can also be exercised over accounts with other financial institutions.

Cl. 20 of the Bill proposes an amendment to sec 64 (First Meeting of Creditors) which will defer the need for a first meeting until after a Statement of Affairs has been filed. In most cases it is futile to convene a meeting before a Statement of Affairs has been lodged as the Statement details the creditors and the moneys owed to them.

Enhancement of the Special Protection Accorded to Maintenance Creditors

For various reasons default under maintenance orders is rampant in Australia. Earlier this year I released a report prepared by my Department on this matter ( 'A Maintenance Agency for Australia, The Report of the National Maintenance Inquiry'). At paragraph 1.53 of the Report the following statement appears: 'If a respondent is sufficiently determined the payment of maintenance can be made a voluntary act'.

In 1980 the Joint Select Committee on the Family Law Act ['Family Law in Australia: A Report of the Joint Select Committee on the Family Law Act'] made a specific recommendation, at para. 5-83, relating to changes to the Bankruptcy Act to facilitate the enforcement of maintenance orders. This recommendation is the genesis of the amendment to sub-sec 40 (3) which is proposed by cl. 11 of the Bill.

A further amendment, relating to maintenance is proposed by clause 3. This will clarify the definition of ''maintenance order'' by removing any doubt that the term includes an order for arrears of maintenance.

It is realised that the problem of enforcement of maintenance orders is an enormous one in our community. Action in this area, for example along the lines of the recommendations in the Report of the National Maintenance Inquiry referred to earlier, will require some time. However the changes proposed in this Bill will alleviate in part the difficulties confronting a maintenance creditor endeavouring to recover arrears of maintenance.

Improving the Administration of the Act

As the Bankruptcy Act presently stands, appointments to statutory offices are made by the Governor-General (section 16 of the Act). This procedure involves a not inconsiderable amount of time and paperwork. It imposes a relatively routine task on Executive Council. It is, therefore, considered more suitable that such appointments should be made by the Permanent Head of the Ministry of State responsible for the administration of this Division of the Act. At present this would be the Secretary of Attorney-General's Department.

This is a task with which the Secretary of my Department is quite familiar. A significant number of appointments to similar offices are already made by him pursuant to powers delegated under sub-section 17 (2) of the Law Officers Act 1964.

Another change in this category involves the functions and powers of the Inspector-General in Bankruptcy. For example, clause 4 proposes to amend section 12 of the Act to enable the Inspector-General to obtain from registered trustees such reports as he may presently obtain from Registrars and Official Receivers. One way in which this power will be useful is in obtaining information for inclusion in the Annual Report on the operation of the Bankruptcy Act. Honourable Senators will recall that earlier in this sitting I tabled the most recent Annual Report, covering the financial year 1982/83. Some of the statistical information in that Report, particularly in relation to amounts of money received and disbursed by registered trustees, is known to be understated as it is not presently possible to obtain relevant information from every registered trustee.

It is also proposed, by clause 36, to amend section 179 to permit the Inspector -General to make application to the Court for an inquiry into the conduct of a trustee. This removes a shortcoming in the powers of the Inspector-General. Section 12 of the Act charges the Inspector-General with the function of conducting inquiries and investigations. However, in the event that these inquiries or investigations disclose some irregularity, the Inspector-General has no power to act upon his findings. The amendment proposed to section 179 will rectify this shortcoming.

Achieving Greater Uniformity with Companies Act 1981

There are of course significant differences in the role of the Bankruptcy Act and that of the winding up provisions of the Companies Act. In winding up, as the expressive term ''liquidation'' indicates, the corporate entity is extinguished. Needless to say, the Bankruptcy Act cannot adopt such a facile solution. Bankruptcy must involve a significant rehabilitative content as the debtor will re-enter the commercial community. Certainly however both enactments deal with insolvency, one with the insolvency of individuals or natural persons, the other with the insolvency of corporate bodies. To that extent it is desirable that creditors should receive similar treatment irrespective of whether the debtor is an individual or a corporate body. Consequently clause 24 and 25 propose amendments to those sections of the Act which regulate the rights of the creditors inter se. The changes will achieve a greater degree of uniformity with the corresponding provisions of the Companies Act.

Therefore quite significant changes are proposed to section 109 and a new section 109A is inserted. As a result creditors will be able to expect largely similar treatment in a winding up and in a bankruptcy.

Very significant changes are proposed by clause 30 to 37 of the Bill to Part VIII of the Act, which relates to trustees. The amendments will entrench in the Act the qualifications which are necessary for a person to obtain registration as a trustee. They will also permit a greater degree of supervision of the continuing suitability for registration of trustees. There is at present no requirement for regular reporting or updating of bonds by registered trustees in bankruptcy. Once again many of these changes are modelled upon the corresponding provisions of the Companies Act relating to the registration of liquidators. For example clause 29 amends section 155 which deals with the registration of persons as trustees. The new provisions largely reflect sub-sections 20 (2) and (4) of the Companies Act, combined with section 227 of that Act.

Reversal of the RCF decision

In 1981 the previous Government amended the Bankruptcy Act in order to channel a large proportion of administrations of bankrupt estates to the private sector. Most of those changes, which were implemented by the Commonwealth Functions ( Statutes Review) Act 1981, are reversed by this Bill.

Experience has shown that the changes were implemented in such haste that no thought was given to the need for new measures to ensure that the newly expanded role of private trustees was subjected to proper scrutiny and regulation. The number of new estates handled by private trustees grew from 13 out of 5,154 in 1980/81, or 0.25%, to 1063 out of 5,156 in 1982/83, or 20.62%. 1980/81 was the last complete financial year under the old arrangement, and 1982/83 is the first complete financial year under the new arrangement.

It is not the policy of the Government to exclude registered trustees from the administration of bankrupt estates. However it is apparent that the majority of registered trustees perceive their role as administrators, and not as investigators. Thus the registered trustees have realised assets and distributed dividends, but have largely disregarded the discretionary duty to investigate and report upon the conduct, dealings and affairs of the bankrupt.

Consequently this Bill proposes, by cl. 8, an amendment to sec. 19 of the Act. The result will be that in all bankruptcies, whether administered by the Official Trustee or by a registered trustee, the investigatory role will be performed by the Official Receiver.

Honourable senators will note that a number of the amendments proposed in this Bill relate to the control over or regulation of private trustees. For example, as mentioned earlier, Cl. 4 amends sec 12 to permit the Inspector-General to obtain reports from registered trustees, cl. 30 amends sec. 155 to strengthen the requirements for registration, cl. 35 inserts a new sec 161A to require registered trustees to lodge triennial statements, and cl. 36 amends sec. 179 to empower the Inspector-General to apply to the Court under that section. All of these changes have become necessary as a result of inadequacies in the Act exposed during the time of an expanded role for private trustees. Some trustees have engaged in distinctly unprofessional conduct; statistics indicate that many trustees, even most trustees, do not take seriously the investigative and reporting duties which the Act imposes on the trustee of a bankrupt estate.

The thrust of the RCF changes was to oblige the appointment of a registered trustee wherever the divisible assets exceed $10,000 in value. By reversing the RCF decision it will now be up to the creditors to meet together and pass a resolution appointing a registered trustee as trustee of the estate, pursuant to section 157 of the Act. The reversal of the RCF decision will not, therefore, preclude registered trustees from playing a role under the Act. It will ensure that, for a registered trustee to obtain appointment, he or she must command the support of a majority in value of the creditors present and voting at the meeting.

The changes proposed by this Bill represent a blend of the experience before the RCF changes and the experience subsequent to those changes. Prior to Act No. 74 of 1981, as the figure cited earlier for the participation of registered trustees indicates, registered trustees played an insignificant role in the administration of bankrupt estates. Partly this may have been due to the then section 166 of the Act which prohibited a trustee from solicitation in obtaining proxies or in procuring the trusteeship.

Act No. 74 of 1981, repealed section 166 and made a number of changes which greatly increased the role of registered trustees. As mentioned earlier, that Act failed to consider the need for new measures which would ensure high standards of conduct by registered trustees.

However, in deciding to reverse the changes effected by Act No. 74 of 1981, the Government has decided not to reintroduce the earlier prohibition of solicitation.

It may well be that, in the future, steps can be taken once more to expand the role of registered trustees. This however will need to be coupled with adequate measures to ensure that the public interest, as well as the interests of bankrupts and creditors, are protected. Experience in the last 2 1/2 years has shown this to be essential.

Financial Impact Statement

The Bill will result in an increase in the number of new estates administered by the Bankruptcy Branch of my Department. The impact of this increase is not expected to be felt until late in 1985 (it is not expected that the changes will commence operation until early next year). The increased workload will require some extra resources, estimated at 42 extra staff. The resources required will be reviewed in the 1985-86 Budget context.

This demand for extra resources will, however, be offset by other savings in expenditure. At present a task force of 47 temporary employees is working in the Branch to reduce backlogs in work. The engagement of the estimated 42 staff will permit the Branch to administer the level of new estates, and to prevent the recurrence of backlogs. The need for the extra staff will coincide with the conclusion of the task of the Task Force. Consequently there will be no nett increase in staff levels, and a nett reduction in expenditure will be possible. Also, the increased costs will be partly offset by expected increased revenue from the Common Investment Fund and from fees.

On the assumption that 42 extra staff will be required, the anticipated nett cost of the proposal is $869,088. This will be offset by savings resulting from the conclusion of the work of the Task Force. The savings resulting from this amount to $1,646,384. Consequently it will be possible to achieve a saving of $ 777,296 over current levels of expenditure. More detail of the costings are contained in a table attached to the copies of this speech. With the concurrence of honourable senators I incorporate the following table in Hansard:

Estimated Annual Costs Resulting From Reversal of the RCF Decision

It is estimated that the additional work to be transferred to the Official Trustee will be able to be performed by 42 officers. Estimated costs associated with these officers are as follows:

$ -Salaries 797,260 -Standard Salary Overhead Costs (60% of Salary) 478,356

Estimated Costs 1,275,616

Additional revenue will be derived from the Common Investment Fund and from official fees and changes. Details are as follows:

$ Additional Fees & charges 282,528 Revenue from the CIF 124,000


Consequently, the nett cost is $869,088.

COMMENT: It would not be expected that the level of fees, charges and CIF interest would be achieved to 100% during the first year of operation.

Savings resulting from the conclusion of the work of the Task Force are as follows:

$ -Salaries 1,028,990 -Standard Overhead Costs 617,394


These figures relate to the expected costs and additional revenue once the changes have become fully operational. It is expected that the amendments will be proclaimed to come into effect in early 1985. This will result in an increased intake of new estates by Bankruptcy Branch which will increase gradually through the year. The full impact will be felt around the end of 1985. There will therefore be no financial impact in the current fiscal year, or the fiscal year 1984-85. The financial impact will be felt only in the second half of the year 1985-86.

I commend the Bankruptcy Amendment Bill to the Senate.

Debate (on motion by Senator Collard) adjourned.