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Wednesday, 20 March 1985
Page: 526

Senator GARETH EVANS (Minister for Resources and Energy)(6.42) —I move:

That the Bill be now read a second time.

I seek leave to incorporate the second reading speech 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 modify the legislative implementation of the Review of Commonwealth Functions decision 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. In relation to the second report 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. However the need for a thorough review of insolvency law in this country has been apparent for some time. Accordingly, in 1983, as Attorney-General, I issued a reference to the Law Reform Commission to report generally on insolvency law and practice.

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

modification 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 realization of assets by the Official Trustee in Bankruptcy. At any point in time it is a large sum of money, usually in the order of $12 million to $13 million. This money is invested and, subject to the provisions of section 20J, interest earned by the Fund is paid to Consolidated Revenue. Section 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, section 20B and section 20H. Amendments to these sections are proposed by clause 11 and clause 12 respectively of the Bill before honourable senators.

Similarly, time and judicial decisions have exposed flaws in other provisions of the Act. Thus, clause 25 proposes an amendment to section 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 financial institutions other than banks.

Clause 20 of the Bill proposes an amendment to section 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 filed as the Statement details the creditors of the bankrupt 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. In 1984, as Attorney-General, I released a report prepared by the Attorney-General's 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. 13 of the Bill.

A further amendment, relating to maintenance is proposed by cl. 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 (sec. 16 of the Act). This procedure leads to a degree of inflexibility and inefficiency in the processing of such appointments. It imposes a relatively routine task on Executive Council. It is, therefore, considered more suitable that such appointments should be made by the Secretary to the Ministry of State responsible for the administration of this Division of the Act. At present this would be the Secretary to the Attorney-General's Department.

This is a task with which the Secretary to that Department is quite familiar. A significant number of appointments to similar offices are already made by the Secretary pursuant to powers delegated under sub-sec 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, cl. 4 proposes to amend sec. 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 prepared pursuant to sec. 314 of the Act.

It is also proposed, by cl. 32, to amend sec. 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. Sec. 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 sec. 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 of provisions of the Companies Act. In winding up, as the expressive term ''liquidation'' indicates, the existence of the corporate entity is extinguished. The Bankruptcy Act is concerned with the insolvency of individuals; mainly people who have become insolvent through some change of circumstances, such as unemployment or illness.

Consequently, 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 cls. 23 and 24 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 sec. 109 and a new sec. 109A is inserted. As a result creditors will be able to expect largely similar treatment in a winding up in a Bankruptcy.

Very significant changes are proposed by cls 29 to 32 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 by trustees nor for the 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 cl. 29 amends sec. 155 which deals with the registration of persons as trustees. The new provisions largely reflect sub-secs. 20(2) and (4) of the Companies Act, combined with sec. 227 of that Act.

Modification 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 modified 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 per cent, to 1,063 out of 5,156 in 1982-83, or 20.62 per cent. 1980-81 was the last complete financial year under the old arrangement, and 1982-83 was 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 realized assets and distributed dividends, but have largely disregarded the discrepancy duty to investigate and report upon the conduct, dealings and affairs of the bankrupt.

Investigation of bankruptcies must continue to be given significant priority. Insolvency fraud does occur, even if only in a small number of bankruptcies. Mr Costigan's Royal Commission uncovered some instances of persons using bankruptcy to defraud their creditors whilst concealing the gains for their own benefit.

Consequently this Bill proposes, by cl. 10, an amendment to sec. 19 of the Act. The result will be that in a bankruptcy administered by a registered trustee, there will be a reserve power of investigation cast upon the Official Receiver. In the first instance the duty to investigate will remain with the registered trustee. If however the trustee indicates that he or she does not intend to investigate then the Official Receiver may elect to do so. This is the effect of the new sub-sec. 19 (1C) proposed by sub-cl. 10 (e).

Honourable senators will note that a number of the amendments proposed in this Bill relate to the control over or regulation of registered trustees. For example, as mentioned earlier, cl. 4 amends sec. 12 to permit the Inspector-General to obtain reports from registered trustees, cl. 29 amends sec. 155 to strengthen the requirements for registration, cl. 31 inserts a new sec. 161A to require registered trustees to lodge triennial statements, and cl. 32 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. Over the past 12 months the Federal Court of Australia has cancelled the registration of some trustees as a result of misconduct. Some other trustees have themselves become bankrupt as a result of their mishandling of administrations under the Bankruptcy Act. 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. All of these factors point to the need for amendments to Part VIII of the act in order to improve the control over registered trustees.

The thrust of the RCF changes was to oblige the appointment of a registered trustee wherever the divisible assets exceeded $10,000 in value. This was done by requiring a petitioning debtor (seeking to make himself bankrupt) or a petitioning creditor (seeking to make someone else bankrupt) to file the consent of a registered trustee along with the petition. The modification of the RCF will make the filing of such a consent optional rather than mandatory.

The option will be exercised by the petitioner, whether petitioning creditor or petitioning debtor. It will remain possible for the creditors to meet together and pass a resolution appointing a registered trustee as trustee of the estate, pursuant to sec. 157 of the Act. The reversal of the RCF decision will not, therefore, preclude registered trustees from playing a significant role under the Act. However, it will ensure that the involvement of registered trustees is coupled with proper safeguards and checks.

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, which gave effect to the RCF decision, as the figures cited earlier for the participation of registered trustees indicate, registered trustees played an insignificant role in the administration of bankrupt estates. Partly this may have been due to the then sec. 166 of the Act which prohibited a trustee from solicitation in obtaining proxies or in procuring the trusteeship.

Act No. 74 of 1981 repealed sec. 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 modify the changes effected by Act No. 74 of 1981, the Government had decided not to reintroduce the earlier prohibition of solicitation.

It may well be that, in the future, steps can be taken once more to further 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 the Attorney-General's Department. The impact of this increase is not expected to be felt until mid-1986. (It is not expected that the changes will commence operation until late this year). The increased workload will require some extra resources, estimated at 42 extra staff. The resources required will be reviewed in the 1986-87 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.

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 late 1985. This will result in an increased intake of new estates by the Bankruptcy Branch which will increase gradually through the year. The full impact will be felt around mid-1986. There will therefore be no financial impact in the current fiscal year, or the fiscal year 1985-86. The financial impact will be felt only in the first half of the year 1986/87.

I commend the Bankruptcy Amendment bill to the Senate.

Debate (on motion by Senator Sheil) adjourned.