The Bankruptcy Legislation Amendment (Anti-avoidance) Bill 2006 demonstrates the Government’s continuing commitment to combating abuse of Australia’s bankruptcy laws.

The amendments in this bill will strengthen the existing anti-avoidance provisions in the Bankruptcy Act 1966. Those provisions allow the trustee to recover property disposed of prior to bankruptcy or owned by a third person but acquired by that person using the bankrupt’s resources. People approaching bankruptcy may deliberately avoid these provisions by transferring assets to family members or close associates and then purposely delaying the commencement of the bankruptcy. It is also possible for people to build up wealth in the lead up to bankruptcy in the name of a person who allows the bankrupt to use or benefit from property acquired with that wealth.

This bill will amend the claw back provisions in the Bankruptcy Act by:

(a)   increasing the claw back period in section 120 from 2 to 4 years for transfers of property by a bankrupt to a related entity for less than market value;

(b)   introducing a rebuttable presumption of insolvency for the purposes of the sections 120 and 121 where a bankrupt has failed to keep proper books, accounts and records; and

(c)   providing that a transfer made to defeat creditors is void against the bankruptcy trustee under section 121 if it was reasonable for the transferee to infer that the bankrupt’s main purpose in transferring the property was to defeat creditors.

A further amendment to the claw back provisions will address the situation where a transferee passes on market value consideration to a third party (instead of to the transferor who subsequently becomes the bankrupt), and the third party does not provide market value consideration to the transferor. By deeming this transaction to be a transfer between the bankrupt and the third party for the purposes of sections 120 and 121 of the Act, this amendment will allow the trustee to utilise section 120 to recover for the bankrupt estate the consideration received by the third party.

Similarly, the effect of this amendment on section 121 is that a transfer made to defeat creditors would not be protected from that provision where paragraph 121(4)(a) was not satisfied- i.e. where the third party did not give market value consideration for the property that constitutes the consideration.

The bill also includes some minor amendments to clarify that certain things are not to be regarded as ‘consideration’ for the purposes of the claw back provisions.

Significant amendments to Division 4A of Part VI of the Act will allow those provisions to apply to property held by a natural person. The amendments will allow the court to make orders in relation to property or money of a natural person where during the period of up to 5 years prior to bankruptcy:

• the person acquired an estate in property as a direct or indirect result of financial contributions made by the bankrupt during that period; or the value of the person’s interest in particular property increased as a direct or indirect result of financial contributions made by the bankrupt during the period; and
• the bankrupt used or derived (whether directly or indirectly) a benefit from the property during the relevant period.

The time periods in Division 4A of Part VI will be aligned with the amendments to section 120. That is, the trustee will be able to recover property acquired by the person or the increase in the value of property held by the person in the two year period prior to bankruptcy or four years if the person is related to the bankruptcy. In both cases, the period can be extended to up to 5 years if the bankrupt was insolvent at the relevant time. There will also be rebuttable presumption that the bankruptcy was insolvent if, at the time, they had not kept proper books and records.

A further amendment contained in the bill will allow transcripts and notes from examinations under sections 77C and 81 of the Act to be used in proceedings under the Act, regardless of whether the person examined is a party to the proceedings. Use of these transcripts in bankruptcy proceedings will facilitate the identification of the major issues and evidence. These amendments will assist trustees particularly in relation to proceedings to recover property for the benefit of creditors.

The amendments contained in this bill are the result of extensive stakeholder consultation. They ensure the appropriate balance between the rights of individuals to organise their affairs as they see fit and the rights of creditors to be paid. The amendments will also preserve the integrity of the bankruptcy system.

I commend the bill to the Senate.