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Thursday, 14 November 2002
Page: 6432

Senator LUDWIG (5:54 PM) —The Bankruptcy Legislation Amendment Bill 2002 was introduced into the House of Representatives on 21 March 2002. A previous bill, substantially similar to the one now before the Senate, was introduced last year and lapsed when the election was called. In introducing the bill, 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. Over the years, some unscrupulous debtors have learned to use bankruptcy as a sword to defeat the legitimate claims of their creditors.

That sentiment—the idea that bankruptcy is used by the rich rather than the broke—has been on the rise over the previous year, given the prominence which has been given in the media to high-profile bankrupts, including a number of lawyers who appear to be living the high life while being officially bankrupt—some of them more than once. If the bankruptcy law is being abused, it is appropriate that it be reviewed and amended to ensure that loopholes cannot be exploited.

Labor certainly supports those measures in the bill which will make it harder for otherwise well-off people who are using bankruptcy improperly. However, despite the hype generated by the Attorney-General, there is little in this bill which will have any substantial impact on cracking down on the top end of town. On the contrary, much of the reform is squarely directed at low-income people who are forced to go into bankruptcy because they cannot pay the debts they have incurred. They are the people referred to in ITSA's recent report entitled Profiles of debtors. This is a bill which is typical of a government that protects the greedy, not the needy. The last major overhaul of bankruptcy legislation was in 1996, shortly after the coalition came to office. The 1996 bill was substantially based on Labor's 1995 bill and incorporated amendments recommended by the Senate Legal and Constitutional Legislation Committee in September 1995.

This bill does a number of things. It gives official receivers 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 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 threshold 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 a consequence of the Insolvency and Trustee Service Australia—that is, ITSA—having become an executive agency. 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 having accepted it. This measure was heavily criticised, as it would have lengthened the period of harassment already faced by bankrupts from creditors and debt collectors, without showing any appreciable benefits for creditors. 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 upon.

Concerns were expressed during the Senate committee hearing on this bill that, in drawing up the reforms, the government paid little attention to those organisations who 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 repayments—it may be that they have too many credit cards and just cannot cope with the financial situation in which they find themselves—one of the first people they often see is a financial counsellor. These people are at the coalface of our personal insolvency system. Often, by visiting a financial counsellor, it is possible to provide people with the assistance to budget their way out of debt. Other times, the only option is bankruptcy.

I would have thought that, in framing a personal insolvency system, one of the most important groups of people to listen closely to would have been the financial counsellors. But the Wesley Community Legal Service expressed the view:

... proper consultation with interested and relevant community based welfare organisations did not occur but rather lip service was paid to a few select organisations ... financial counselling organisations were not consulted properly.

The detailed provisions of the bill, which are targeted more at the low-income bankrupts who are in over their heads than at the bankrupt barristers who sit back in their harbourside mansions, reflect that 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. That is a shocking indictment of a government which has professed to govern for all Australians but which instead has been caught time and time again knocking down those who are least able to stand up for themselves.

The bill proposes to abolish the provisions 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 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 granted. In respect of early discharge, the second reading speech tabled by Senator Bob McMullan, as he was then, on 22 August 1995 stated:

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 six months from the time when he or she files a statement of affairs with the registrar. The eligibility criteria are: firstly, the bankrupt has no, or insufficient, divisible property to enable a dividend to be paid to creditors; secondly, the bankrupt has not disposed of property in a transaction that is void against the trustee; and, thirdly, 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.

Disqualifying criteria include where the bankrupt has previously been bankrupt or the unsecured liabilities of the bankrupt exceed 150 per cent of his or her income in the year prior to the date of bankruptcy, more than 50 per cent of the bankrupt's unsecured liabilities are attributable to the conduct by the bankrupt of business activities and the bankrupt has given false or misleading information about his or her assets, liabilities or incomes. From these qualifications and disqualifications, it is clear that the abolition of the early discharge provisions will only affect low-income earners and will only affect them in respect of their 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 Legislation Committee into the bill were characterised by a complete lack of evidence as to the need for the abolition of the early discharge provisions. Mr Donald Costello, Acting Adviser for the Insolvency and Trustee Service Australia, who provided evidence to the committee on the policies underlining the proposed changes, summed it up in this way:

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.

I believe that the abolition of these provisions is actually an expression of this government's attempt to divide Australians by scapegoating the most disadvantaged. I am confident that Australians will reject the negativity of this government, just as Northern Territorians rejected attempts by Mr Denis Burke to divide the Northern Territory community by running on the issues that he did.

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'. This is happening to Australians across the country. With an explosion in the use of credit cards over the last decade, more and more people have access to easy credit and more and more people are running into financial trouble—so much more that now Australians are faced with paying an extra 10 per cent on everyday items whenever they go to the cash register.

And what is this government's approach? Instead of recognising that its policies have forced greater financial hardship on individuals and small businesses and in many cases sent them to the wall, this government is now in denial that people run into debt trouble not because they are irresponsible about spending their money but because the pressure on them is so great that they are driven into debt. In introducing this bill, the Attorney-General said:

The provisions were targeted at a new category of bankrupt—consumer debtors with low asset backing who over-extend and then cannot repay their debts. However, many believe that bankruptcy in this group is due more to lack of financial responsibility than to misfortune.

This is a cold and heartless statement from a cold and heartless government—one which has inflicted so much hardship on struggling Australians and which then seeks to blame them for that hardship. The government should not be blaming struggling Australians for the hardship that it has visited upon them.

Labor does not support the heartless philosophy behind the abolition of these early discharge provisions and believes that no compelling justification has been advanced for their abolition. Instead, Labor will seek to amend the bill to retain the early discharge provisions but to allow early discharge only after two years. This proposal will create a greater incentive for potential bankrupts to enter into alternative arrangements such as debt agreements to avoid bankruptcy, while still providing some relief for low-income debtors who have bitten off more than they can chew by virtue of the increased difficulties forced upon them by this government. The bill also seeks to amend section 265(8) of the Bankruptcy Act, which provides:

A person who has become a bankrupt and, within 2 years before or she became a bankrupt and after the commencement of this Act, has contracted a debt provable in the bankruptcy of an amount of $500 or upwards without having at the time of contracting it any reasonable or probable ground of expectation, after taking into consideration his or her other liabilities (if any), of being able to pay the debt, is guilty of an offence and is punishable, upon conviction, by imprisonment for a period not exceeding 1 year.

The bill proposes to amend the section by removing the minimum threshold requirement of $500. The government says that the amendment will prevent the situation arising where a person could not be prosecuted when, before bankruptcy, they went on a spree and ran up a number of debts of less than $500 each but who at the time had no `reasonable or probable ground or expectation of being able to pay the debt'.

The government also claims that the amendment will bring the Bankruptcy Act into harmony with the equivalent Corporations Law provision. Labor's concern is that the abolition of the threshold may result in the prosecution of debtors who have incurred small debts—of amounts less than $500—for example, in respect of unpaid utility bills or overdue rent payments. This is more evidence that the government is out of touch with the basic needs of struggling Australians. The inability to meet the costs of these necessities of life should not result in the possibility of prosecution.

While there is an interest in bringing the insolvency law into harmony with the Corporations Law, the approach should not be inflexible. After all, corporations do not have to incur basic personal expenses necessary to live, whereas people do. Accordingly, Labor will seek to amend the section so that a person cannot be prosecuted for incurring a debt in respect of a reasonable or necessary personal or household expense without any reasonable ground or expectation of being able to pay the debt.

Section 271 of the Bankruptcy Act effectively retrospectively criminalises gambling in the two years prior to the declaration of bankruptcy. There are a number of problems with this provision. First, problem gamblers are not aware and could not be expected to know that their gambling may later place them in breach of section 271 of the Bankruptcy Act. Second, the existence of section 271 acts as a disincentive to problem gamblers declaring bankruptcy to begin to address their debt problems and turn their lives around. Third, and this is probably most concerning, fear of imprisonment may actually increase suicide risk for problem gamblers contemplating bankruptcy as a last resort. I think we would all agree that a person should not be discouraged from declaring bankruptcy for fear that doing so will turn him or her into a criminal. Whatever the reason behind the introduction of section 271, it appears out of place today, now that we have a greater understanding of gambling as an addiction.

While the government has focused on removing protections for low-income earners, it has shirked the real issue: cracking down on those people who use bankruptcy as a means of avoiding their tax obligations. Labor is concerned that the proposals put forward by the government do not at all address loopholes—which are predominantly taken advantage of by high-income bankrupts—in part X of the act. Part X provides for three alternatives to bankruptcy: entering into a deed of assignment, a deed of arrangement or a composition with creditors.

While the use of part X arrangements has declined in recent years, ITSA has stated that part X arrangements 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 a debtor and creditors together to work out arrangements that may result in a 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 to cure perceived defects.

In 1987 the Australian Law Reform Commission report identified abuses including: debtors giving misleading or inadequate information to creditors; controlling trustees convening meetings in obscure places and not giving sufficient notice of meetings; debtors stacking meetings with persons who exercise or purport to exercise voting rights in favour of the debtor; and conducting meetings without an impartial chairman. Many of these recommendations have never been acted upon. Labor has moved a number of amendments to address weaknesses and flaws in part X—provisions which high-income earners are over-represented in utilising.

I welcome the fact that the Attorney-General has recently responded to Labor's call for a review of part X. It certainly came as a surprise, after a spokesperson for the Attorney-General was quoted in the Age earlier this year as saying there was no need to reform part X `because the rules are already designed to provide as much protection as possible to creditors'. Now it appears that the Attorney-General is not so sure. While a review is welcome, it must be backed by meaningful action to crack down on part X abuses. The government cannot simply sit on whatever recommendations ITSA makes as it has sat for 10 months on the bankrupt barristers report.

As I have said, if bankruptcy laws are being abused it is appropriate that they be reviewed and amended to ensure that loopholes cannot be exploited. Labor supports the measures in the bill which will make it harder for otherwise well-off people who are using bankruptcy improperly. However, I urge the government to support Labor's amendments when they are moved at the committee stage because they would restore a degree of balance, equity and compassion to the government's bill.