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Thursday, 14 November 2002
Page: 6439


Senator KIRK (6:27 PM) —I rise to speak on the Bankruptcy Legislation Amendment Bill 2002. As Senator Ludwig said earlier, the opposition do not oppose this bill but we will be seeking to move amendments during the committee stage to address the provisions which we believe impact harshly on low-income bankrupts. In doing so, Labor wish to emphasise that, despite the government's claim that the bill is tough on bankrupts, the reforms will in fact impact harshly on low-income bankrupts whilst not adequately addressing bankruptcy rorts at the big end of town.

Both the Bankruptcy Legislation Amendment Bill and the Bankruptcy (Estate Charges) Amendment Bill 2002 were introduced into the House of Representatives on 21 March this year. Previous bills substantially similar to these bills were introduced during the last parliament but lapsed when the November 2001 election was called. It has been said in the chamber this afternoon that in recent times we have seen some very high-profile bankrupts—for example, barristers who have not met their tax liabilities for a number of years and have then sought to avoid those obligations through bankruptcy. Labor has argued that the law must be changed so as to prevent high-income earners from using the bankruptcy law to their advantage. It is for this reason that Labor supported the thrust of the proposed amendments in the House of Representatives but expressed its concern about the impact of the changes on low-income bankrupts. In the other place, Labor shadow Attorney-General, Mr McClelland, argued that the bill should have gone further to prevent abuses of bankruptcy law by the top end of town, particularly with respect to part X arrangements. Labor argued there, and will also argue in this place, that this should have been the focus of the government's legislative response to bankruptcy rorts rather than aiming the reform at those at the lower end 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, shortly after the coalition was elected. In 1996 the government then introduced legislation that was substantially based on Labor's 1995 bill and incorporated amendments by the Senate recommended by the then Senate Legal and Constitutional Legislation Committee in September 1995. The bill before us today introduces a number of measures. Firstly, 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. Secondly, the bill abolishes early discharge from bankruptcy. Thirdly, it will make it easier for trustees to lodge objections to a person's discharge from bankruptcy and it will make it harder for bankrupts to sustain challenges to objections. Fourthly, it makes it clear 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. Fifthly and finally, it doubles the current income thresholds for debt agreements so as to allow and encourage many more debtors to choose this particular alternative to bankruptcy. Other changes proposed by the bill have the effect of streamlining the operation of the act or are as a consequence of the Insolvency and Trustee Service Australia having become an executive agency. Those changes are of a technical nature. Labor supported them in the other place and will also support them in the Senate. The 2002 bill drops a measure that was 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. Labor was pleased to see that provision removed from the bill.

While Labor supports the need for bankruptcy reform, there are a number of aspects of this bill which are less than satisfactory. A number of these aspects were referred to by Mr McClelland in the other place and also by Senator Ludwig in this chamber this afternoon. Firstly, it has been said that the consultation process surrounding the bill was not as broad as it should have been. This concern was expressed during the Senate committee hearings on these bills. In particular, the government paid little attention to financial counsellors who give advice to the low-income earners who are affected by debts which may lead to bankruptcy. The Senate committee heard that the bill will disadvantage many of the poor in society and their families while debt collectors stand to gain.

The first of Labor's concerns regarding the specific provisions of the bill is in relation to early discharge. The bill proposes to abolish the provisions currently contained in the act which allow early discharge for low-income bankrupts. Labor has concerns that those who will be most affected by this measure will be those who are most vulnerable in our society. As has been said, the government has not made a convincing case at all for the abolition of early discharge. Administrative early discharge provisions were introduced 10 years ago, 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 then 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 Federal Court. In almost all cases where early discharge was sought, the order was in fact granted.

Under the current early discharge provisions, a bankrupt may apply for early discharge after six months from the time when he or she files a statement of affairs with the registrar. There are restrictions on the eligibility criteria for this early discharge. Firstly, 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, the bankrupt must not have disposed of property in a transaction that is void against the trustee. Thirdly, the bankrupt must earn 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, they are not at a level where income would actually be distributed during the course of the bankruptcy to creditors.

There are also several disqualifying criteria. These include, firstly, where the bankrupt has previously been a bankrupt; secondly, where the unsecured liabilities of the bankrupt exceed 150 per cent of his or her income in the year prior to the date of the bankruptcy; thirdly, where more than 50 per cent of the bankrupt's unsecured liabilities are attributable to the conduct by the bankrupt of business activities; and, fourthly, where the bankrupt has given false or misleading information about his or her assets, liabilities or income. These are quite strict and, importantly, apply only in respect of the first bankruptcy. Early discharge is not available in respect of second and subsequent bankruptcies. As I and a number of other members have said, there is no evidence that these provisions are being abused.

Public hearings held 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. Labor is concerned that the government, in introducing these measures, is singling out those who become bankrupt as a result of troubled times, rather than addressing the underlying causes of their difficulties. The key feature of the early discharge provisions is to deal with the increasing number of consumer bankruptcies which are due more to misfortune than misdeeds. As Labor members, including me, have said in this chamber recently, the blow-out in credit card debt, in addition to the burden imposed by the high mortgages resulting from the dramatic increase in property values in Australia, is imposing tremendous burdens on Australian families. We say that the error of the government's approach is that the government, instead of recognising that its policies—in particular the GST— have imposed greater financial hardship on individuals and small businesses, is introducing laws that target the people who are suffering as a consequence of its policies. The Attorney-General almost said as much when he said, in introducing the bill, 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. Labor says that this is a harsh way to treat one of the most vulnerable groups in our society. The government, rather than trying to change the law to make life harder for these people, should be directing its attention to changing the policies that it has introduced, those policies that have imposed financial burdens particularly on families who have very low levels of income.

Labor does not support the abolition of early discharge provisions and will not be supporting them in this place. We believe that an appropriate balance could be achieved to try to prevent people from too easily going into bankruptcy in the first place and also to permit them to try and get their lives in order. In order to achieve this balance, we are seeking to move an amendment which will allow an application for early discharge to be made after a two-year period. As Senator Ludwig said earlier today, the effect of this proposal will be to create a greater incentive for potential bankrupts to enter into alternative arrangements, such as debt agreements. Labor believes that this balance that I have described reflects a more appropriate balance between the two competing policies.

The second area of concern that Labor has is the incurring of debts within two years prior to bankruptcy. This is set out in section 265(8) of the act. The effect of this section is that it 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 punishable by imprisonment for a period not exceeding one year. Labor's view is that to remove this $500 threshold is particularly harsh. The government's argument is that the section enables rorting. The government says that the effect of the section is that people could go on a serial spending spree purchasing a number of small items but, nonetheless, running up a total of more than $500 and therefore equally offending the principles contained in the section of the act.

The government's other argument is that it brings it into line with the Corporations Law. But it is quite clear to most of us, particularly to those on this side, that bankruptcy law applies to individuals, not corporations. Furthermore, individuals are not corporations. Individuals, particularly those who are supporting families and children, need to incur debts—everyday household expenditures such as rent, electricity, gas, telephone bills and the like—in order to survive. We say that it is harsh in the extreme to suggest a change to the law which could see a parent jailed for incurring a necessary expense for, say, their children's schooling or other needs. We say that this is a particularly harsh and inflexible approach. Labor has proposed that there be a proviso included in the 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.

The third area of concern to Labor is in respect of the offence of contributing to insolvency by gambling in the two-year period prior to bankruptcy. Labor is well aware of the financial devastation that gambling can cause to individuals and families. Effectively, though, section 271 of the act retrospectively criminalises gambling. The difficulty with this 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 could well 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. The effect of this could well be to increase the personal problems of problem gamblers and could lead to devastating consequences, even suicide. There is no doubt that problem gambling needs to be addressed but periods of imprisonment are not the answer to the serious social problem that gambling brings about.

The final provisions that I wish to refer to are those that go to the operation of part X of the act. These provisions apply to those who have or have had substantial assets. Labor's concern is that the proposals put forward by the government do not address the loopholes in part X of the act. 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. Labor recognises that these provisions are important because, if they are properly used, they often result in debtors receiving more than they would have received if the person simply became the 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 generally has been seen as quite a useful mechanism for bringing debtors and creditors together to work out arrangements that may well result in a better outcome for all parties concerned. Nevertheless, over the years it has become clear that the procedure is open to abuse and some legislative amendments have been proposed.

Back in 1987 there was a Law Reform Commission report on these perceived defects of part X. This Law Reform Commission report included four principal points. The first point was the need to prevent the use of these provisions where debtors have given misleading or inadequate information to creditors regarding their financial circumstances. The second point dealt with controlling trustees convening meetings in obscure places and not giving sufficient notice of meetings. The third point related to debtors stacking meetings with persons who purport to exercise voting rights in favour of the debtor. Finally, there were concerns about conducting meetings without an impartial chair—coming back to someone who may have been, for example, a professional adviser to the debtor.

All of these measures are measures that Labor believes need to be addressed. Labor has devised amendments that will address these concerns. It hopes that the government will see that they are constructive changes. As Senator Ludwig pointed out, finally the Attorney-General has recently responded and said that there will be a review of part X. Labor welcomes this review but urges that it must provide positive outcomes that remove the loopholes to which I have referred. I urge senators to support Labor's amendments in the committee stage, which we believe will seek to restore, as Senator Ludwig said, balance, equity and finally compassion to this bill.