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Bankruptcy Legislation Amendment Bill 2002

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2002

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

BANKRUPTCY LEGISLATION AMENDMENT BILL 2002

 

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

 

(Circulated by authority of the Attorney-General,

the Honourable Daryl Williams AM QC MP)

 

 

 

 

 

 

 

 

 

 

 

 

 



BANKRUPTCY LEGISLATION AMENDMENT BILL 2002

 

 

Readers’ Guide

 

This Explanatory Memorandum is divided into three main sections: a general outline of the main provisions of the Bankruptcy Legislation Amendment Bill 2002 (the Bill) (Section 1); a discussion of the main policy objectives underlying each of the provisions (Section 2, commencing at page 7); and a detailed discussion of each provision, item by item (Section 3, commencing at page 11).

 

Section 1 - General Outline

 

2          The Bankruptcy Legislation Amendment Bill 2002 (the Bill) will make a number of significant changes to bankruptcy law.  The changes address concerns that the bankruptcy system is biased toward the debtor and that debtors are not encouraged to think seriously about the decision to declare themselves bankrupt.  The changes also address unfairness and anomalies, particularly in relation to the operation of the early discharge arrangements and the lack of effective sanctions on uncooperative bankrupts.  Finally, the changes will streamline the administration of bankruptcies by trustees.

 

3          The objects of this Bill are to:

 

 (a)         give 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;

 

(b)          abolish early discharge from bankruptcy;

 

(c)          strengthen the objection-to-discharge provisions of the Bankruptcy Act 1966 (the Act) by making it easier for trustees to lodge objections to a person’s discharge from bankruptcy and harder for bankrupts to sustain challenges to objections;

 

(d)          make 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; and

 

(e)          raise by 50% the current income threshold for debt agreements, to allow and encourage many more debtors to choose this particular alternative to bankruptcy.

 

4          Other changes proposed by the Bill are consequential on the above measures, streamline the operation of the Act or are a consequence of the Insolvency and Trustee Service of Australia (ITSA) having become an executive agency.  The changes include those to:

 

(g)          allow the Inspector-General to enquire into the activities of debt agreement administrators and of solicitors who are controlling trustees;

 

(h)          give the court a power, in specified circumstances, to effect the discharge of a bankrupt, despite the bankrupt’s failure to meet the formal requirements for filing a statement of affairs;

 

(i)           make the filing of a debtor’s petition an act of bankruptcy;

 

(j)           allow the amounts of final judgments or final orders obtained by a creditor to be amalgamated for the purpose of meeting the $2,000 threshold for the issue of a bankruptcy notice;

 

(k)          require an Official Receiver to reject debtors’ petitions of debtors who do not have  the same connection with Australia as is required in relation to creditors’ petitions;

 

(l)           amend several machinery provisions about creditors’ meetings to:

(i)        require trustees, when convening a meeting, to consider the convenience of creditors;

(ii)       clarify the quorum provisions that apply to creditors’ meetings;

(iii)      require trustees to provide to initial creditors’ meetings an estimate of the trustee’s total remuneration and of its impact on dividends (if any) to creditors;

(iv)      clarify the voting rights of a secured creditor by correcting an unintended consequence of the wording of a 1996 amendment of the Act; and

(v)       allow holders of proxies lodged at a meeting to vote on subsequent motions at that meeting, including at any adjourned part of that meeting;

 

(m)         introduce a streamlined meeting procedure to allow creditors to meet and vote by post, and also to resolve proposals for variations of section 73 compositions and schemes of arrangement by a similar means, if no creditor objects to this procedure;

 

(n)          allow a trustee to refuse to call a section 73 meeting unless adequate provision has been made for trustee fees that have been approved but are unpaid, and for the costs of, and trustee remuneration regarding, the meeting;

 

(o)          require bankrupts to notify trustees of material changes to matters relevant to a trustee’s administration of a bankrupt’s estate;

 

(p)          provide that a debtor is liable for new debts incurred during his or her cooling-off period, even when bankruptcy follows at the end of that period;

 

(q) make clear that priority amounts due to a bankrupt’s employees for unpaid wages  extend to unpaid superannuation, and that Medicare levy constitutes income tax for contribution scheme purposes;

 

(r)           allow the Court to deny, to those debtors who file frivolous counter-claims, set-offs or cross demands as defences to a bankruptcy notice, the benefit of the subsection 41(7) extension of time for compliance with the notice;

 

(s)           allow creditors, by special resolution, to permit a bankrupt to retain sentimental property of a prescribed kind;

 

(t)           require trustees to realise assets in a bankrupt estate within a 6 year period after discharge but allow trustees to extend that time, in appropriate circumstances, on giving written notice to the bankrupt;

 

(u)          alter the contributions scheme provisions to:

(i)        remove the ‘zero income’ test of whether a person is a bankrupt’s “dependant” and allow an eligible person to earn up to an amount prescribed by the regulations and still qualify as a dependant;

(ii)       clarify which income tax refunds are assets that vest in the trustee and which are income for contributions scheme purposes;

(iii)      allow trustees, rather than an Official Receiver, to determine a higher income threshold in the income contribution scheme if the bankrupt is in circumstances of undue hardship;

(iv)      require trustees to notify contributors of their rights to have a trustee’s assessment decisions reviewed; and

(v)       introduce a standard 60 day limit for most applications for a review of a trustee’s decisions, including those on contributions assessments and the filing of objections;

 

(v)          ensure that a bankruptcy cannot be annulled on full payment of the debts unless interest on the interest-bearing debts has been paid to the date the debts are paid;

 

(w)         ensure that no person who applies to be registered as a bankruptcy trustee can be registered unless, at that time, the person has the ability - and not merely the capacity to acquire the ability - satisfactorily to perform the duties of a registered trustee;

 

(x)          increase the statutory minimum remuneration for registered trustees by 8.4% to take account of the impact of the goods and services tax and other tax reform measures;

 

(y)          allow bankruptcy administrations to be transferred from one trustee to another, without a formal meeting of creditors, provided the creditors agree;

 

(z)          introduce a streamlined procedure to allow variations and terminations of Part X deeds of arrangement and compositions if the debtor is in default and no creditor objects to this procedure;

 

(za)         allow the trustee, rather than the Court, to consent to a bankrupt travelling overseas and, whether or not the bankrupt is a contributor, to impose written conditions on that consent, the breach of which conditions will be an offence;

 

(zb)        require that applications for an extension of time for payment of interest charge and realisations charge be made before the payment is due;

 

(zd)        extend to Part X trustees eligibility for the assistance available, under section 305, to trustees in a bankruptcy;

 

(ze)         abolish a bankrupt’s direct access to an external tribunal for review of trustee decisions, eg, those about income contributions and objections to discharge.

 

 

 

Financial Impact Statement

 

5          There is a resource implication for the Insolvency and Trustee Service Australia (ITSA) arising from the proposed increase in the income cutoff for debt agreements.  Debt agreement numbers have increased markedly in 2001-02 to more than double the number in the previous year and extending access to debt agreements by increasing the income cut-off by 50% to $47,500 will result in further increases.  ITSA’s role is to assess debt agreement proposals against elgibility criteria, refer them to creditors and supervise the voting on them.  An estimated 15 additional staff will be allocated to this activity.  It is expected that the financial impact of the other measures in the Bill will offset each other.     

 

 



Regulation Impact Statement

 

PROPOSED AMENDMENTS TO THE BANKRUPTCY ACT AND REGULATIONS APPLYING TO THE REGISTRATION OF BANKRUPTCY TRUSTEES.

 

Background: The present trustee registration scheme

6          The Bankruptcy Act 1966 (the Act) makes provision for the registration of private sector trustees to administer bankrupt estates.  Trustees are registered for an initial period of 3 years and can apply for re-registration after that time.  Re-registration is automatic on application and payment of a fee (currently $1,000).  The fee partially recovers the costs of administering the registration system. The provisions of the Act require applicants to hold certain qualifications and to have relevant experience and prescribe the duties of a trustee.

 

7          On receiving an application a Committee is convened to consider it.  The Committee comprises the Inspector-General, an officer of the Attorney-General’s Department and a member chosen by the Insolvency Practitioners Association of Australia (IPAA).  The Inspector-General must act in accordance with the Committee’s recommendation.

 

8          A person who applies to become a trustee is registered if they meet criteria set out in section 155A of the Act.  The Committee assesses the suitability of the applicant using criteria relating to minimum academic qualifications, experience, knowledge and abilities, insurance coverage, and moral and business conduct.

 

9          Section 155A(3) of the Regulations provides the Committee with some discretion to register a trustee who does not meet all the requirements (defined in Regulation 8.02) prescribed by the regulations.

 

10        There are about 200 trustees registered, of which 165 are active.  An inactive trustee is one who has not taken on any new estates in the past year.  He or she may still be working on older estates, as an estate can take several years to finalise. 

 

11        There are no limits to the number of trustees registered at any time.  In the past, where there were insufficient trustees in a particular area, staff of ITSA encouraged qualified people to apply for registration.

 

12        Qualifications and experience are tested not only at initial registration.  Continued eligibility is tested through ITSA investigations of complaints about specific conduct of trustees, its periodic inspections of the trustees’ practices and regular reporting to the Inspector-General in Bankruptcy. 

 

13        If ITSA considers a trustee is not performing satisfactorily, the Inspector-General may call upon a Committee to determine whether the trustee should be de-registered or have conditions imposed on his or her further practice as a registered trustee.

 

14        There is a right of review to the Administrative Appeals Tribunal (the AAT) of all the Inspector-General’s decisions regarding registration.

Problems

15        Two issues needed to be addressed:

 

(a)     In November 1998, the AAT made a decision that two applicants who did not meet the specific criteria could nonetheless be registered because, in its opinion, they had the capacity to become trustees.  The Tribunal members relied, as they were entitled to, upon a strict view of subsection 155A(3).  That provision was intended to allow registration of otherwise qualified applicants who may have had international qualifications that did not exactly fit those prescribed.  However, it was cast in wider terms and the applicants fell within them. 

 

Following the AAT decision, senior counsel advised that, in his view, it was a real threat to the continued efficacy of the registration scheme, particularly if applied in future registration review matters before the AAT.  Counsel also recommended that the Committee be able to require applicants to sit an exam. 

 

(b)     Unrelated issues have been the lateness of applications by some trustees to extend their registrations and the delay by some in paying estate charge due by trustees under the Bankruptcy (Estate Charges) Act 1997 .

 

Objectives

16        The objectives of the current trustee registration system are:

 

(a)     that only competent and adequately qualified practitioners work as bankruptcy trustees; and

 

(b)     that registration extension applications be lodged before the expiry of current registration and that charge debts be paid by the due date.

 

Options

- initial registration

17        As to objective (a), there were only two options available. Option one, doing nothing, was undesirable because, first, it would not achieve the outcome required of the registration system and, secondly, applicants would be left unsure about the standard of knowledge required of them.

 

18        Option 2 was to recast section 155A to ensure that applicants cannot be registered if the Committee is not satisfied that they have the ability (including knowledge) to perform satisfactorily the duties of a registered trustee.  In that regard, the proposed insertion of a provision empowering a Committee to require applicants to sit for an exam will assist the Committee’s decision making. 

 



19        In parallel, the involuntary termination provisions in section 155H are proposed to be amended to extend the grounds on which a trustee can be asked to give the Inspector-General a written explanation why he or she should continue to be registered.  Under the proposal, an explanation can be sought if the Inspector-General believes that the trustee no longer has the ability (including knowledge) to perform satisfactorily the duties of a registered trustee.  Regulations would also be amended to support this course of action.

 

- re-registration

20        As to objective (b), again, one option would have been to do nothing.  However, this was unacceptable, as trustee re-registration applications should be lodged before the relevant expiry date, and charge payments should be made by the due date for payment.  Option 2 was to make the necessary changes to address these issues.

 

21        To encourage trustees to apply and pay for re-registration on time, it is proposed to add a provision prohibiting re-registration if the person owes more than $50 of notified charge, or of penalty in relation to it.  It is also proposed to bring forward the due date for applications and payment of fees to a month before current registration expires. 

 

22        Payment of the fee late, but before the current registration expiry date, will attract a 20% penalty.  If the fee and the penalty are not paid before the current registration expiry date, the trustee will be unregistered and will need to apply to the Court to become registered again.

 

Costs imposed by the new regulatory measures

23        Under both proposed measures, there ordinarily will be no additional registration costs to the Government or trustees.  The assessment of a trustee for initial registration will continue to be made by a Committee using standards applied before the AAT decision, but with the Committee also having the proposed new option of requiring the applicant to sit an exam.

 

24        Trustees will re-register, as, as at present, by application. By encouraging on-time payment this proposal is expected to reduce trustee applications to the Court for registration and the associated expense.

 

25        Additional costs will be incurred if a trustee has failed to perform in a satisfactory manner in the preceding 3 year period.  This will be assessed by ITSA periodically and the trustee given advice after each inspection.  If a trustee falls short of the standards, he or she will be asked prior to the date for re-registration to explain why he or she should continue to be registered.  If the response is unsatisfactory, a Committee will be convened to assess the application for re-registration.

 

26        The proposed amendments will impose a small additional cost on ITSA, which must evaluate trustee performance. This is consistent with the regulatory role already performed and in line with planned enhancements to regulatory procedures in other areas.

 

27        It is anticipated that the need to convene the Committee would be rare, as most trustees respond to reports made following annual inspections.  The costs of convening Committees are about $3,000.

 



Consultation

28        The consultants who reviewed the trustee registration provisions consulted key stakeholders in the personal insolvency system, including registered trustees, creditors, and financial counsellors, the Bankruptcy Reform Consultative Forum and a bankruptcy discussion group in Melbourne.  Public submissions were called for but no submissions were received.

 

29        The parties affected are the trustees.  The IPAA has agreed that regulation of trustees is desirable and should continue in its present form.  It has indicated that it is desirable to have an effective mechanism for weeding out non-performers.

 

30        Without competent trustees, creditors and bankrupts could be affected adversely and costs to government in dealing with complaints would escalate.  Eventually, creditor confidence in the bankruptcy system as a whole would be affected adversely.

 

31        The Bankruptcy Reform Consultative Forum and a reasonable sample of active trustees in each State were consulted by ITSA about the proposed registration extension procedures.  No objections were raised.

 

Conclusion

32        The amendments proposed clarify and strengthen the registration provisions to enable the registration Committee to recommend for registration only those applicants who have the necessary qualifications, experience and practical expertise to undertake satisfactorily the duties of a trustee.  They encourage trustees to lodge and pay for re-registration on time.

 

33        The proposed amendments will have little financial impact while enhancing the Inspector-General’s capacity to ensure the desired outcome that only those individuals who are competent are registered and remain registered

 

Implementation

34        The proposals are to be implemented by amendments to Division 1 of Part VIII of the Act and by amendments to the Bankruptcy Regulations.

 

Review

35        The registration scheme and the inspections of trustees are reviewed regularly to ensure they are meeting their objectives.  The Inspector-General reports annually to Parliament on both the outcomes achieved by regulation of trustees and the registration process.

 

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Section 2 - Policy objectives

 

Official Receiver’s discretion to reject a debtor’s petition

36        There has never been an insolvency test for petitioning debtors and this basic principle will remain largely undisturbed by the Bill.  However, some debtors petition for bankruptcy for the wrong reasons: their petitions are an abuse of laws intended to protect debtors who cannot pay their debts, and to give them a fresh start. 

37        Accordingly, in quite limited circumstances, Official Receivers will be able to reject a debtor’s petition.  The Bill proposes that, where it appears to the Official Receiver, from information in the statement of affairs (or from other information supplied by the debtor) that, if the debtor did not become a bankrupt, the debtor would be likely to be able to pay the debts, within a reasonable time, the Official Receiver may reject the petition.

38        However, the discretion can only be exercised if, in addition to the above:

(a)     it is evident to the Official Receiver that the debtor is petitioning because of an unwillingness (and not an incapacity) to pay; or

(b)     the debtor has been bankrupt previously, on his or her own petition, either at least three times in all or at least once in the last 5 years.

39        This measure is directed only at the most blatant abuses of the system.  It is not envisaged that any petition will be rejected under this proposed measure without personal or telephone contact first being made with the debtor by senior, experienced ITSA staff. 

40        Importantly, the Bill proposes that the Official Receiver will not be bound in every instance to consider whether to exercise the discretion.  This means that, as now, the vast majority of petitions will be accepted without any enquiry into the debtor’s solvency.

41        A debtor whose petition is rejected through the exercise of the Official Receiver’s discretion will be able to have that decision reviewed by the Administrative Appeals Tribunal (the AAT.)

Abolition of early discharge

42        The Bill proposes the abolition of the early discharge provisions of the Act.   These provisions are most often cited as the cause of concern that bankruptcy is too easy.  The reduced period of bankruptcy is seen to discourage debtors from trying to enter formal or informal arrangements with their creditors to settle debts, and provides little opportunity for debtors to become better financial managers.

 

43        Also, when introduced, early discharge was described as applying to those whose bankruptcy was brought about by ‘misfortune’ rather than ‘misdeed’.  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, they have not achieved their stated intent.  There is no evidence that qualifying for early discharge is a sound measure of whether a bankruptcy has been due to misfortune rather than misdeed. 

 



44        There is no intrinsic reason why bankrupts who have assets available for distribution or income sufficient to make a contribution to the estate (which disqualifies them for early discharge) are less worthy of early discharge than those who do not.  In addition, allowing only those whose debts exceed 150% of income to apply, discriminates against women who have joint debts with, and generally a lower income than, their spouse.  In other words, the provisions operate in quite discriminatory ways.

 

Objection-to-discharge provisions strengthened

45        The objection-to-discharge provisions allow bankruptcy trustees to lodge an objection to the bankrupt’s automatic discharge at the end of the 3 year standard period of bankruptcy.  Depending on the grounds of objection, the standard bankruptcy period can be extended by 2 years or, in more serious cases, by 5 years.

 

46        Under the present regime a notice of objection must set out the ground(s) of objection, refer to the evidence that, in the trustee’s opinion, establishes the ground(s) and state the trustee’s reasons for objecting to discharge on the ground(s) specified in the notice.

 

47        In practice, trustees often have found it difficult to maintain objections.  Frequently, objections have been cancelled on review by the Inspector-General, the Administrative Appeals Tribunal (AAT) or the Federal Court.  The reasons for cancellation vary.  Some trustees have found it difficult to differentiate clearly the ground(s) of an objection and the reason for filing the objection.  Moreover, on occasions, the AAT has upheld a bankrupt’s challenge to an objection simply because, either during an AAT hearing or just before it occurs, the bankrupt eventually has provided information long sought by the trustee and the non-supply of which information was the ground of the trustee’s objection.  Such decisions undermine a prime purpose of the objection regime which is to induce a bankrupt to cooperate, promptly, with the trustee of the bankrupt estate. 

 

48        The Full Federal Court decision in Inspector-General in Bankruptcy v Nelson (1998) 168 ALR 340 establishes that a sufficient reason for filing an objection under the current provisions is that doing so will advance the trustee’s administration of the bankrupt estate.  However, conversely, punishment of the bankrupt for failure to cooperate was found to be an impermissible reason for filing an objection. 

 

49        To address these deficiencies in the present law which have hampered a trustee’s capacity to elicit cooperation from some bankrupts, and to strengthen the trustee’s hand, the Bill proposes a tougher objection-to-discharge regime under which it is expected that more objections will withstand the review process.

 

50        It is proposed that trustee objections will fall into one of two groups, namely, those which specify at least one ‘special ground’ and those which specify none.  In the first group, the trustee’s notice of objection still will have to set out the ground(s) of objection and the evidence relied on to establish it or them, but need not state the reasons for filing an objection to the bankrupt’s discharge from bankruptcy.  For objections which contain no ‘special ground’, the trustee will be obliged, as now, to provide in the notice the trustee’s reasons for filing an objection.

 



51        The existing objection grounds in paragraphs 149D(1)(d) to (h) inclusive will now constitute special grounds, as will those in proposed new paragraphs 149D(1)(ab), (da), (ha) and (ma).  The existing objection grounds in paragraphs 149D(1)(a), (b) and (h) to (n) inclusive will constitute other grounds, as will the ground in proposed new paragraph 149D(1)(aa).  Special grounds are directed at deliberate actions by the bankrupt to defeat creditors or to hinder the trustee’s administration.  The bankrupt’s pre-objection conduct, rather than the trustee’s capacity to show that an objection will advance the conduct of the administration, will determine whether any notice of objection will have to state the reason(s) why it has been lodged.  Examples of special grounds that may be listed in an objection notice and regarding which no reasons are required include:

 

(a)     any transfer is void against the trustee in the bankruptcy because of section 121 (ie, the section which deals with property transfers to defeat creditors) (proposed new paragraph 149D(1)(ab)); and

 

(b)     after the date of the bankruptcy, the bankrupt intentionally provided false or misleading information to the trustee (proposed new paragraph 149D(1)(da)) .

 

52        Proposed new subsection 149N(1A) identifies the special ground paragraphs.  As noted, they relate to deliberate actions which can disrupt a trustee’s administration or which are intended to defeat creditors. While it can be difficult to infer intention, in each instance the burden of proof which the trustee will bear if an objection is challenged is the civil onus, ie, proof on the balance of probabilities. 

 

53        Further, by proposed subsection 149N(1B), a reviewer will not be able to cancel an objection by taking into account any conduct of the bankrupt after the time when the ground first commenced to exist.  Objections on special grounds will be reviewable only as to whether the ground(s) and evidence are made out, unless the reviewer is satisfied by the bankrupt that the facts supporting the objection arose without any fault on the bankrupt’s part. 

 

54        While a trustee’s hand is strengthened greatly by the proposed new provisions, it remains the case that a trustee does not have to file an objection unless subsection 149B(2) applies, and a trustee can cease to object on a particular ground (section 149H) or withdraw an objection at any time (section 149J). 

 

Annulment of bankruptcy by Court whether or not petitioning debtor insolvent

55        Section 153B of the Act gives the Court power to annul a bankruptcy if it is satisfied that a petition ought not to have been presented.  The Bill proposes an amendment to make clear that the Court can so decide, even if the debtor is insolvent. 

 

56        High-income debtors who are maintaining an expensive lifestyle and petition for bankruptcy with the aim of avoiding paying a particular creditor (eg, the ATO) will be among those targeted by this proposed amendment.  If the Court believes that the debtor could make arrangements to pay the creditor it could annul the bankruptcy as an abuse of process.

 

Raising by 50% the current income threshold for debt agreements

57        Debt agreements were introduced in 1996 as a low-cost alternative to bankruptcy, available to low-income debtors with assets and debts below specified thresholds.  Debtors cannot access the provisions if they have an after-tax income of more than $31,176 (if there are no dependants) and either their assets or debts exceed $62,352 (these are January 2002 figures, and are subject to 6-monthly indexation).  The comparatively low income threshold has been criticised as denying the debt agreement alternative to a group of debtors whose circumstances would be well suited to it. 

 

58        It has been noted that debtors who were ‘too poor’ to be required, under one Part of the Act, to make contributions from income for the benefit of their creditors were nonetheless invited, under another part of the Act, to make a debt agreement proposal to creditors.  Despite this criticism, 2,320 debt agreement proposals were lodged with ITSA for processing in 2000-01.  Raising the threshold by 50% will increase substantially the number of debtors who will be able to make a debt agreement proposal to their creditors as an alternative to bankruptcy.  It is consistent with an important theme of the reform measures - to encourage debtors to consider the alternatives seriously before choosing bankruptcy.

 

 

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Section 3 - Notes on sections and Schedule items

 

Section 1 - Short Title

 

59        The Bankruptcy Legislation Bill Amendment 2002 (the Bill) proposes amendments to the Bankruptcy Act 1966 (the Act).  By proposed section 1, when the Bill has been enacted, it will be known as the Bankruptcy Legislation Amendment Act 2002. 

 

Section 2 - Commencement

 

60        In accordance with the table in proposed section 2, proposed sections 1 to 3 and anything in the Bill not elsewhere covered in that table will commence on the day of Royal Assent.  Proposed Schedule 1 will commence on a day to be fixed by Proclamation.  If the proclaimed day has a date more than 6 months after the day of Royal Assent, the Schedule 1  provisions will commence on the first day after the end of that 6 months period. 

 

Section 3 - Schedule

 

61        Proposed section 3 is a drafting device to allow all the amendments proposed to be made to the Bankruptcy Act 1966 to be set out in a Schedule.  The items in the Schedule will amend the Act and will have effect according to their terms.  Notes on the Schedule items follow and include notes on transitional and application items.

 

Schedule 1—Amendments to the Bankruptcy Act 1966

 

(This schedule sets out all of the amendments proposed to be made to the Bankruptcy Act 1966 .)

 

Part 1—Amendments

 

Definitions

62        Items 1, 2 and 4 inclusive propose amendments to subsection 5(1) of the Act which contains a number of definitions of terms used in the Act. 

 

63        Item 1 proposes to insert a definition of administrator by which a person authorised (under paragraph 185C(2)(c) of the Act) to deal with property under a debt agreement is an administrator.  The definition is relevant for proposed provisions relating to the Inspector-General’s proposed powers in relation to debt agreement administrators. The term administrator will also apply to a replacement administrator appointed after an administrator’s death to complete that person’s administrations.  The replacement administrator will be an Official Receiver appointed by the Inspector-General or another person subsequently appointed by an Official Receiver.

 

64        Item 2 proposes a definition of authorised employee to refer to an Australian Public Service employee whose duties include supporting either or both of the Inspector-General or the Official Receivers in the performance of their functions, or in the exercise of their powers, under the Act.  This definition is relevant to changes proposed by several items [5, 8, 50, 78 and 141] in Schedule 1 to delete references to ‘officer of the Department’ and substitute references to ‘authorised employee’.  The former terminology is now inappropriate due to ITSA’s status, from 1 July 2000, as an executive agency quite separate from the Attorney-General’s Department.  

 

65        Item 3 replaces an incorrect reference to ‘section 56’ in the subsection 5(1) definition of debtor’s petition with a correct reference to ‘section 56A’. 

 

66        Item 4 inserts a definition of offence against this Act as including an offence against section 137.1 or 137.2 of the Criminal Code and being an offence that relates to this Act.  The purpose of inserting this definition is to ensure that the expression ‘offence against this Act’ picks up offences which were contained in the Bankruptcy Act but have been consolidated into the Criminal Code.  By transitional provision item 227, this provision will apply to conduct which constitutes an offence at any time.

 

67        Item 5 proposes to replace the words ‘officer of the Department’ in subsection 11(4) of the Act with the words ‘authorised employee’.  Since ITSA became an executive agency on 1 July 2000, it no longer is a part of the Attorney-General’s Department and nor are its staff.  This change will enable the Inspector-General to continue to delegate powers to the same persons as previously, ie, currently, those who are individual ITSA staff members, but in their capacity as an ‘authorised employee’ rather than as an ‘officer of the Department’.

 

Enquiry powers regarding controlling trustees

68        Item 6 proposes the insertion of the words ‘(including a controlling trustee)’ after the words ‘conduct of a trustee’ in paragraph 12(1)(b) of the Act.  This proposed amendment will empower the Inspector-General to inquire into and investigate the conduct of a controlling trustee just as he or she may now do regarding a trustee. 

 

Enquiry powers regarding debt agreement administrators

69        Item 7 proposes an amendment to subsection 12(1) to extend the Inspector-General’s regulation powers under the Act to debt agreement administrators.

 

70        Item 8 is an amendment comparable to that proposed by item 5 and will allow an Official Receiver to delegate powers to an ‘authorised employee’.

 

Appointment of Inspector-General and Official Receivers

71        Item 9 proposes the omission, from section 16 of the Act, of the words ‘Secretary to the Department’ and the substitution of the word ‘Minister’.  The effect of this is that the Inspector-General and each Official Receiver will be appointed by the Minister rather than, as previously, by the Secretary to the Attorney-General’s Department.  The previous arrangement was appropriate when the Inspector-General headed a Division of that Department and is inappropriate now that ITSA is an executive agency.  By transitional provision item 229, existing appointments will continue in force after commencement.

 

72        Item 10 proposes to repeal existing subsections 17(1) to 17(6) inclusive and to substitute new subsections.  Proposed subsection 17(1) will provide for the Minister to appoint a person to act as Inspector-General.  Similarly, by proposed subsection 17(2), the Inspector-General may appoint persons to act as Official Receivers.  Section 33 of the Acts Interpretation Act 1901 provides more details of how these types of provisions apply and are to be interpreted.

 

73        Item 11 is a drafting amendment made as a consequence of the changes effected by item 10.  By transitional provision item 202, existing appointments will continue in force after commencement.

 

Duties of trustee

74        Item 12 makes a change to paragraph 19(1)(i) which nominates the Inspector-General, in addition to relevant law enforcement authorities, as a person to whom trustees are to refer any evidence of an offence by a bankrupt against the Act.  By transitional provision item 199, this provision will apply to conduct at any time. 

 

Official Trustee’s powers to investigate a bankrupt’s affairs

75        Subsection 19AA(2) currently gives an Official Receiver the power to investigate any bankrupt's conduct and examinable affairs, and the books, accounts and records kept by the bankrupt, in relation to any bankruptcy.  These investigative powers are necessary and appropriate for the trustee of a bankrupt estate, but not for an Official Receiver.

 

76        Accordingly it is proposed by items 13 and 14 that subsection 19AA(2) be repealed and subsection 19AA(1) amended to include the Official Trustee (by changing the term "registered trustee" to "trustee").

 

77        By transitional provision item 203, changes to section 19AA will apply to bankruptcies for which the date of the bankruptcy is after commencement.

 

Alteration of filing date for statement of affairs

78        Item 15 proposes to insert new section 33A into the Act.  The effect of this new section is to allow the Court to order that a statement of affairs be treated as having been filed at a time before it was actually filed, provided that the Court is satisfied that the bankrupt believed, on reasonable grounds, that this statement had been filed at a time before it actually was filed.  Proposed subsection 33A(3) allows a period of grace of 30 days before the order can take effect to allow the trustee to disengage from the role of trustee.  By transitional provision item 204, the change will apply to statements of affairs filed at any time, whether before or after commencement.

 

Acts of bankruptcy

79        By items 16 and 17, the updating of terminology used in paragraphs 40(1)(ha) and (hb) of the Act is proposed; references to ‘Official Trustee’ would be replaced by references to ‘Official Receiver’.  These changes are consistent with terminology changes proposed by items 144 to 149 inclusive, items 151 and 153, and items 155 to 166 in recognition that the processing of debt agreement proposals is more appropriately an Official Receiver function than an Official Trustee function: see the notes on those items.  

 

80        Item 18 proposes the insertion of subparagraph 40(1)(daa) into the Act.  The effect of this new proposed provision will be to make the presentation of a debtor’s petition an act of bankruptcy.  Section 43 of the Act provides to the effect that where a debtor has committed an act of bankruptcy the Court may, on a petition presented by a creditor, make a sequestration order against the debtor’s estate.  By item 29, it is proposed to give Official Receivers discretion to reject a debtor’s petition.  Thus, if a petition is so rejected, a creditor will be able to rely on the fact of its presentation as an act of bankruptcy which will found a creditor’s petition for a sequestration order.   The change proposed by item 18 will apply to petitions presented after commencement.

 

Bankruptcy notices

81        It is proposed by item 19 that subsection 41(1) be repealed and replaced by a new subsection to allow 2 or more final judgments or final orders valued at $2,000 (rather than one as is currently required) to support the issue of a bankruptcy notice.  Item 20 proposes a consequential drafting change.

 

82        Items 21 and 22 propose consequential amendments to paragraphs 41(6A)(a) and 41(6C)(a) to take account of the fact that multiple final judgments or final orders may support the issue of a bankruptcy notice.  By transitional provision item 205, these changes will apply to the issue of bankruptcy notices on applications that are made after commencement.

 

83        The amendment proposed by item 23 omits a reference in paragraph 43(2)(a) of the Act to Division 3 of Part VII because it is proposed by this Bill to repeal that Part which, in specified circumstances, provides for early discharge from bankruptcy after 6 months.

 

Taking control of debtor’s property after a creditors’ petition is presented

84        Item 24 proposes to amend subsection 50(1) of the Act to allow a creditor who wishes to have a controlling trustee appointed over a debtor’s property to apply to the Court for such an appointment after a creditor’s petition has been presented, as well as after a bankruptcy notice has been issued against the debtor.  The amendment will restore to this group of creditors a right inadvertently taken from them as an unintended consequence of an amendment in 1996.  By transitional provision item 207, this change will apply to any creditor’s petition that is presented after commencement.

 

85        A technical amendment to paragraph 54(1)(a) of the Act is proposed by item 25 to make clear that a debtor against whom a sequestration order has been made is to make out and file, ‘with the’ Official Receiver a statement of his/her affairs.  The present wording requiring that the statement be filed ‘in the office of’ the Official Receiver has proved confusing.

 

Copies of statements of affairs

86        Item 26 proposes an amendment to subsection 54(4) of the Act to give a person who presently can ‘make copies of’ a statement of affairs the right to ‘obtain’ a copy of a statement of affairs.  Administratively, this arrangement will be far more convenient for debtors and ITSA staff.

 

87        Item 27 would amend section 54 of the Act to allow a bankrupt the same free access to his or her own statement of affairs as a creditor enjoys.  Also, the Official Receiver is given discretion to refuse to allow a person access under section 54 to particular information in a statement of affairs on the grounds that access would jeopardise, or be likely to jeopardise, the safety of any person.

 

Petitioning debtor must have specified connection with Australia

88        By proposed item 28, new subsection 55(2A) will oblige the Official Receiver to reject a debtor’s petition unless the debtor has an appropriate connection with Australia.  Those connection requirements already apply to petitions for a sequestration order. 

 



Official Receiver may reject a debtor’s petition in particular circumstances

89        Item 29 proposes the insertion of new subsections 55(3AA), (3AB) and (3AC) under which the Official Receiver may reject a debtor’s petition if it appears from the information in the statement of affairs and any additional information supplied by the debtor that, if the debtor did not become a bankrupt, the debtor would be likely either immediately or within a reasonable time to be able to pay all the debts specified in the statement of affairs; and at least one of the following conditions is satisfied:

 

            -      first, it appears from the information in the statement of affairs and any additional information supplied by the debtor that the debtor is unwilling to pay one or more debts to a particular creditor or creditors or is unwilling to pay creditors in general; or

 

            -      secondly, before the current petition was presented, the debtor previously became bankrupt on a debtor’s petition at least three times or at least once in the period of 5 years before presentation of the current petition. 

 

90        The purpose of new subsection (3AA) is to give the Official Receiver discretion to reject a debtor’s petition where it is plain to the Official Receiver that the petition is an abuse of the bankruptcy system. 

 

91        One key purpose of the bankruptcy system is to allow people in a hopeless financial position to rule a line under their debts and be given a fresh start.  However, subsection (3AB) makes clear that the Official Receiver is not required to consider, in relation to any or every debtor’s petition, whether there is discretion to reject it under subsection (3AA).  The Official Receiver is not required to apply an insolvency test to every debtor who petitions for bankruptcy.  Only the more blatant and obvious cases that might come to the Official Receiver’s attention are likely to be considered as to the possible exercise of the discretion.

 

92        By proposed new subsection (3AC), a debtor whose petition is rejected under subsection (3AA) will be able to apply to the Administrative Appeals Tribunal for a review of the Official Receiver’s decision.  By transitional provision item 208, the change proposed by items 28 and 29 will apply to petitions presented after commencement.

 

93        Item 30 proposes a drafting amendment to subsection 55(4) to cover the possibility that a Court may, under provisions of section 55 other than subsection (3), direct an Official Receiver to reject a debtor’s petition.

           

94        Paragraph 55(8)(a) contains a reference to Division 3 of Part VII.  That Division, which deals with early discharge from bankruptcy, is proposed to be repealed by this Bill, so item 31 proposes omission of the reference.

 

95        Item 32 proposes to amend subsection 55(9) to the same effect as the amendment proposed by item 26: see the notes on that item.  Similarly, item 33 would amend section 55 along the same lines as the amendments to section 54 proposed by item 27.

 

96        Paragraph 56E(3)(a) contains a reference to Division 3 of Part VII.  That Division, which deals with early discharge from bankruptcy, is proposed to be repealed by this Bill, so item 34 proposes omission of the reference.

 

97        Item 35 proposes to amend subsection 56F(3) of the Act by removing references to a trustee being a registered trustee.  This change would distinguish the role of the Official Receiver from that of the Official Trustee and put the Official Trustee in the same position as a registered trustee.

 

98        Items 36 and 37 make amendments parallel to those made by item 26 and 32: see the notes on those items.  However, the amendment proposed to be made by item 38 to insert paragraph (aa) in section 56G(2) of the Act has the effect that a person who is a member of a partnership and who became bankrupt as a result of a petition may obtain a copy of or take extracts from any statement of affairs that was given to the Official Receiver in connection with a debtor’s petition against the partnership.  In other words, the petitioning debtor is able to obtain for no fee a copy of his/her own debtor’s petition.  Item 39 makes a consequential drafting amendment as a result of item 38.  Item 40 proposes a similar amendment of section 56G in relation to partnerships as is proposed by item 27 to section 54 in relation to individual debtors: see the notes on item 27.

 

Amendments regarding joint debtors

99        Items 41, 42, 43, 44 and 45 replicate, in relation to joint debtors, the provisions inserted in relation to individual debtors regarding, respectively: the necessity for a debtor to have a specified connection with Australia when petitioning; the Official Receiver’s power to reject a debtor’s petition; the omission of reference to Division 3 of Part VII (the early discharge provisions, proposed to be repealed); and the inspection of a statement of affairs  By transitional provision item 208, the changes proposed by items 41 and  42 will apply to petitions presented after commencement. 

 

Convenience for the creditors of proposed time and place for meeting

100      Item 46 proposes to add a new subsection 54(3) to the Act which would require that, when a trustee is convening a meeting of creditors, the trustee must consider whether the proposed time and place is convenient for the creditors.  This provision does not replace the existing section 64M requirement for a motion on these very issues at a meeting of creditors.

 

A note about proxies

101      Item 47 proposes the addition of a note at the end of subsection 64M(1) which deals with proxy voting at meetings of creditors.  The note points out that, under proposed new subsection 64ZB(3) which deals with proxy voting at creditors’ meetings, a proxy or attorney may vote at a meeting even though the appointing instrument is lodged after the announcement of proxies: see the separate notes on the amendment proposed by item 53.

 

Quorum at a creditors’ meeting

102      Item 48 proposes an amendment of section 64N by the insertion of a new replacement subsection (2) which provides that a quorum is constituted by the presence of the trustee or the trustee’s representative, and a creditor (or proxy or an attorney of a creditor) participating in the meeting in person or by telephone.  This is to overcome difficulties in getting a quorum at creditors’ meetings because of the existing requirement that, if there is more than one creditor, at least two persons - each being a creditor or proxy or attorney of such a creditor - must participate in the meeting in person or by telephone.  However, the note makes clear that, as a meeting requires at least two persons, the person who is the trustee or the trustee’s representative cannot also be the proxy or attorney of the creditor referred to in proposed paragraph 2(b).  This means that a trustee cannot hold a meeting with himself or herself but, for example, could hold the meeting, as trustee, with a member of his/her staff who holds a proxy for a creditor.  By transitional provision item 209, the changes proposed by items 46 to 48 will apply to meetings of which notice is given after commencement.

 

Trustee to advise creditors about estimated remuneration and its impact on dividends

103      Item 49 proposes to amend subsection 64U(5) of the Act by inserting new subsection (5A) under which the trustee must include, in a statement under subsection (3), an estimate of the total amount of his/her remuneration and an explanation of the likely impact of that remuneration on the dividends (if any) to creditors.  The purpose of this provision is to ensure that, as far as possible when creditors are being asked to consider and vote on the trustee’s proposed remuneration, they are fully informed as to how much the trustee is likely to take from an estate as remuneration and the extent to which this will have an effect on dividends, if any, payable to creditors.  For example, if it is clear to the trustee that his/her likely remuneration will mean that there is no prospect of a dividend being paid to creditors, the trustee must inform the creditors to that effect.  By transitional provision item 210, the change proposed by item 49 will apply to meetings held after commencement.

 

104      The amendment proposed by item 50 is a consequential one flowing from ITSA’s change of status from being a Division of the Attorney-Generals Department to being an executive agency under the Public Service Act 1999 : see the notes on item 5.

 

Voting by secured creditors

105      Items 51 and 52 each propose a technical amendment to substitute words in subsections 64Z(9) and 64ZA(5) respectively of the Act.  The changes would adopt the terminology ‘secured creditor’ rather than refer, as now, to a creditor who ‘holds a security in respect of’ a debt.  A change made to the respective subsections in 1996 inadvertently has caused confusion about the creditors’ meeting voting entitlements of creditors who hold a security in respect of a debt.  The effect of the proposed changes will be that a creditor who holds security over property belonging to someone other than the debtor (eg, a creditor who holds a mortgage over the debtor’s parents’ house), can vote for the full amount of the debt.  However, a creditor whose security is held solely over the debtor’s property is a ‘secured creditor’ and can only vote if the debt owed exceeds the estimated value of that security. 

 

Holders of proxies lodged ‘late’ may vote on subsequent motions

106      Item 53 proposes the repeal of subsection 64ZB(3) and the insertion of new subsections (3) and (3A).  Proposed new subsection (3) allows the President to accept new proxies after the formal announcement of initial proxies under section 64M, thus allowing those new proxy holders to vote on subsequent motions.  Holders of proxies lodged with the President at a meeting can vote on motions put after lodgment of the instrument of appointment.

 

107      The purpose of proposed new subsection (3A) is to allow the person appointed as a proxy for the adjourned part of a meeting to be a person different from the person appointed as proxy for the pre-adjournment part of that meeting.

 

108      By transitional provision item 209, the changes proposed by items 51 to 53 will apply to meetings of which notice is given after commencement.

 

Creditors’ resolution without meeting

109      Item 54 proposes the insertion of a new section, section 64ZBA, to allow a trustee to hold the meeting by post.  The proposal addresses the difficulty trustees often encounter in persuading creditors to attend, or send a proxy in relation to, a creditors’ meeting.  The provision is restricted to single proposals and the notice must invite the creditor to vote either yes or no on the proposal or to object to the proposal being resolved without a meeting of creditors.  Provided at least one creditor votes in writing and no other creditor objects in writing to the proposal being resolved without a meeting of creditors, the proposal is decided in accordance with the majorities required for a special resolution or an ordinary resolution.

 

110      A trustee’s signed certificate as to any matter relating to a section 64ZBA proposal is to be prima facie evidence of the matter.

 

Trustee may require surety for cost of meeting

111      Items 55 and 57 propose a mechanism to discourage bankrupts from making frivolous or vexatious requests to the trustee to call meetings to consider a section 73 proposal for the annulment of a bankruptcy.  This outcome is to be achieved by the bankrupt being required to lodge with the trustee an amount that is sufficient to cover the estimated costs incurred in arranging and holding the meeting and the estimated fee that, if approved by the creditors, will be payable to the trustee in respect of that meeting.

 

112      In addition, proposed new subsection 73(2B) will allow a trustee to refuse to call a section 73 meeting if the proposal to be put to the meeting does not make adequate provision for the payment to the trustee of fees accrued in respect of the trustee’s administration of the bankrupt’s estate, and that are not able to be taken out of the bankrupt’s estate.

 

113      As an added safeguard for trustees, subsection 73(3) is proposed by item 56 to be amended to deny the creditors’ meeting power to amend the debtor’s proposal in a way that reduces any provision for payment of fees referred to in proposed new subsection (2B).

 

114      By transitional provision item 211, the changes proposed by items 79 to 81 will apply to proposals lodged, after commencement, under subsection 73(1) of the Act.

 

Variation of composition or scheme of arrangement

115      Item 58 proposes the insertion of new section 74A into the Act to provide for the variation of a composition or scheme of arrangement that has been accepted in accordance with Division 6 of the Act provided the debtor has consented in writing to the proposed variation.  Currently, that Division makes no provision for the variation of such a composition or scheme.  By transitional provision item 212, the change proposed by item 58 will apply to section 73 compositions and schemes of arrangement made after commencement.  Further, by that transitional item, a Part X composition or scheme of arrangement is made when it is accepted by creditors. 

 

116      Proposed subsections 74A(3) to (6) inclusive provide a means by which a variation proposal can be made in writing by the trustee, with the debtor’s consent and without calling a meeting.  The proposed measure does not require that the proposal be voted on by the creditors.  It is a sufficient safeguard that any one creditor who either opposes the proposal or objects to it being resolved without a meeting has the power to challenge it by objecting in the specified manner to it being so resolved.  If at least one creditor lodges such a written notice of objection, the proposal can only be considered in the ordinary way, ie, by calling a formal meeting of creditors. 

 

117      The proposed amendments to be effected by items 59 to 61 are drafting amendments of a technical nature only and do not affect the substantive law. 

 

Duties of bankrupt

118      Item 62 proposes the insertion in the Act of new paragraphs 77(bb) and (bc), to impose on a bankrupt an additional duty, ie, to advise the trustee of any material change in the particulars contained in the bankrupt’s statement of affairs.  By item 63, a material change is to be defined by proposed subsection 77(2) to mean one which could reasonably be expected to be relevant to the administration of the bankrupt’s estate. 

 

119      Items 64 to 66 are all drafting changes of a minor technical nature and do not affect the substantive law. 

 

Trustee powers to investigate

120      The amendments proposed by items 67 to 70 to section 77A, and the repeal of section 77B proposed by item 71, are each a consequence of the fact that the Official Receiver’s existing power under subsection 19AA(2) to conduct an investigation into the affairs of a bankrupt is proposed by this Bill to be repealed because the investigation function is one properly carried out by a trustee: see the notes on item 14.  Accordingly, items 67 to 70 propose to delete references to a person called ‘the investigator’ and insert in their place a reference to ‘a trustee’.  This reflects the fact that it will be a trustee, and not an Official Receiver, who conducts a section 19AA investigation.  By transitional provision item 203, all these changes will apply to bankruptcies for which the date of the bankruptcy is after commencement.

 

121      By item 72, subsection 80(1) of the Act is proposed to be amended by replacing an obsolete reference to subparagraph 6A(2)(b)(i) (which was repealed in 1996) with the requirement that a bankrupt notify his/her trustee of a change of name or of address.  An associated amendment is effected by proposed new paragraph 77(bb): see the notes on item 62.  By transitional provision item 213, the amendment made by this item will apply to a change that occurs after commencement.

 

Time limit for appeal against trustee’s estimate of value of contingent debt or liability

122      Item 73 provides to the effect that where, under subsection 82(4), a trustee estimates the value of a contingent debt or liability provable in the bankruptcy, a person aggrieved by that estimate may appeal to the Court within 28 days after the day on which the estimate is notified to that person.  The imposition of a time limit is to ensure that a trustee’s administration of a bankruptcy is not unduly hindered by an aggrieved person challenging the trustee’s valuation of a contingent liability at a time unreasonably distant from when the person becomes aware of the trustee’s estimate.  By transitional provision item 214, the amendment made by this item will apply to the review of trustee decisions made after commencement.

 

123      Item 74 proposes the repeal of section 99.  This measure is connected with that proposed by item 76: see the notes on that item.  By transitional provision item 215, the amendment made by this item will apply to trustee decisions made after commencement.

 

Debts to be rounded down to nearest dollar

124      Item 75 would repeal existing section 103 and replace it with a new section which provides for the rounding down, to the nearest dollar, of all amounts in proofs of debts which include cents.  By transitional provision item 216, the amendment made by this item will apply to proofs admitted after commencement.

 

Admission or rejection of proofs of debt

125      The amendments proposed by items 74 and 76 would consolidate two current provisions into one provision, the proposed new subsection 104(1).  By transitional provision item 215, the amendments made by these items will apply to trustee decisions made after commencement.

 

Priority of unpaid superannuation contributions

126      Section 109 of the Act provides an order of priority for payments made by a trustee in relation to amounts realised in the administration of a bankrupt’s estate.  Under paragraph 109(1)(e), the fifth priority in subsection 109(1) is payment of amounts due to any employee of the bankrupt, whether remunerated by salary, wages, commission or otherwise, in respect of services rendered to or for the bankrupt before the date of bankruptcy.  There is a limit per employee, being a prescribed amount (as at January 2002, $3,300 (indexed)). 

 

127      Any doubt whether unpaid employer superannuation contributions are accorded any priority at all by section 109 will be resolved by the amendment proposed by item 77.  It makes it plain that they are.  This proposed amendment will align the bankruptcy law with the Corporations Law.  By transitional provision item 217, the amendment made by this item will apply to bankruptcies for which the date of bankruptcy is after commencement.

 

128      Item 78 proposes an amendment to subsection 109(7B) consequential upon the change of status of ITSA from a Division of the Attorney-General’s Department to an executive agency.  It effects no change of substance to the Act.

 

Commencement of bankruptcy: vexatious counter-claims, set-offs or cross-demands.

129      By lodging an unmeritorious counter-claim, set-off or cross demand in relation to a bankruptcy notice, an unscrupulous debtor who has no valid defence to the notice can nonetheless extend the time for compliance with the notice and effectively defer the date of his/her bankruptcy.  A consequence of this deferral is to bring forward the commencement of what otherwise would be the ‘relation back’ period under section 115. 

 

130      Item 79 therefore proposes to amend section 115 by permitting the Court to find that the application under subsection 41(7) to set aside the notice was frivolous, vexatious or otherwise without substantial merit.  If the Court so finds, the bankruptcy is to be taken to have relation back to, and to have commenced, at the time that would have applied under subsection 115(1) if the time for compliance had not been extended under subsection 41(7). 

 

Property divisible among creditors: ‘sentimental’ property

131      Subsection 116(2) of the Act specifies property which is not divisible among the creditors of the bankrupt.  Non-divisible property includes ‘household property’.  There has been doubt, however, whether the term ‘household property’ is apt to cover commercially valuable sporting medals and the like. 

 

132      Under proposed new paragraph 116(2)(ba) to be inserted by item 80, a bankrupt will be able to retain personal property which has sentimental value to the bankrupt and which is of a kind prescribed by the regulations, if creditors, by special resolution, before the trustee realises the property, agree to permit the bankrupt to keep it.

 

133      Relevant regulations have not yet been made: it is intended that the type of property to be prescribed will include such items as sporting medals, trophies, and civil and military awards, but not jewellery.  By transitional provision item 217, the amendment made by this item will apply to bankruptcies for which the date of bankruptcy is after commencement.

 

Time limit for realising property

134      Under proposed new subsection 129AA, to be inserted by item 81, there will be an initial period specified within which a trustee is to realise property. 

 

135      The proposal specifies that, in relation to property disclosed by the bankrupt on the statement of affairs, and to after-acquired property disclosed within 14 days of the debtor becoming aware of it, the revesting time will be 6 years from the date of discharge of the bankrupt (paragraph (3)(b)).  For after-acquired property disclosed after discharge, the revesting time will be 6 years from the date on which the bankrupt discloses the property to the trustee (paragraph (3)(c)).

 

136      The trustee readily will be able to extend the revesting time by up to 3 years in cases where realising the property is not practicable before the original revesting time.  A simple example is the case where a trustee is unable to sell an interest in a house property because that interest is subject to a life tenancy; it will often be the case that the trustee has no practical option but to wait for the life tenant to die .

 

137      The new provisions will encourage trustees to realise assets within a reasonable time frame and discourage undue delays in the administration of an estate.

 

138      Proposed new subsection 129AA(7) provides that section 127 (which allows a trustee to claim property for up to 20 years) will not apply in respect of any property that revests in the bankrupt pursuant to section 129AA.  This will ensure that the trustee cannot rely on section 127 to claim particular property that has revested in the bankrupt.  Section 127 would still apply in respect of property which either was not disclosed by the bankrupt on the statement of affairs or was ‘after-acquired’ property which was not disclosed, in writing, by the bankrupt to the trustee.

 

139      By transitional provision item 219, the amendment made by item 81 will apply to all bankruptcies, including those that ended before commencement.  However, for that latter group, the initial revesting time is to start on the sixth anniversary of commencement, instead of the sixth anniversary of the date of discharge.

 

Powers exercisable by trustee

140      The amendments proposed by items 82 to 85 inclusive would merge the provisions of sections 134 and 135 of the Act.  They would repeal section 135 (item 85) and transfer the remaining provisions of section 135 to section 134, where they will be incorporated as new paragraphs 134(1)(aa), (ab), (ac), (ia) and (ma) respectively.  There is no change proposed to the powers of a trustee: the opportunity is being taken to improve the layout of the law.

 

Trustee’s power to assess liability of bankrupt to make contributions from income

Definition of dependant

141      Item 86 proposes to change the definition of dependant in section 139K of the Act to allow the dependant to earn up to an amount specified in the Regulations (proposed to be $2,500).  Under the current definition a person is disqualified as a dependant if they earn ‘any income’.  That is too restrictive.

 

Income tax includes Medicare levy

142      Item 112 proposes An amendment to 139K of the Act is proposed by item 87 to include a definition of income tax and to make clear that income tax includes Medicare levy.  This amendment is for the avoidance of doubt and does not change the substantive law. 

 

Definition of income

143      Item 88 proposes the repeal of subparagraph (b)(ii) of the definition of income in section 139L of the Act. 

 

144      Section 139L of the Act provides a complex definition of income in relation to a bankrupt for the purposes of the contribution scheme in  Division 4B of Part VI of the Act including for example that some payments under the Social Security Act are income for contribution purposes and others are not income.  The essence of the subparagraph is to be transferred and reproduced, but in clearer form, in the Bankruptcy Regulations.  As the Social Security Act is amended frequently, it is appropriate that these types of provisions be dealt with by the Bankruptcy Regulations which can be more readily amended.

 

Tax refunds

145      Items 89 and 90 propose to amend section 139N of the Act to ensure that the amount of a bankrupt’s unpaid income tax (and which, because of the bankruptcy, will not be payable) is not deducted from the bankrupt’s income, and that a tax refund attributable to the period up to the date of the debtor’s bankruptcy (and which is an asset in the bankruptcy and thus vests in the trustee) is not added to the bankrupt’s income, for the purposes of the contribution scheme. 

 

146      Proposed new subsection 139N(2) provides to that effect for income tax refunds in respect of tax years of income that ended before the date of the bankruptcy.  Proposed new subsection 139N(3) relates to income tax refunds that relate to a tax year of income that straddles the date of bankruptcy.  In such a case, to the extent that the refund relates to the period up to the date of bankruptcy, it is excluded from the debtor’s income for contribution scheme purposes, and that part which relates to the post-date of bankruptcy segment of the year of income is treated as income for the purposes of that scheme.  To simplify calculations, refunds which relate to a straddle year are to be apportioned on a time basis. 

 

Determination of higher income threshold in cases of hardship

147      Item 91 proposes a new section 139T, modelled on existing section 139T, but providing for the trustee of a bankrupt estate rather than the Official Receiver to assess hardship when deciding liability for income contributions.  The trustee is best placed to consider the initial application for hardship.  The trustee’s decision is reviewable by the Inspector-General.

 

148      Items 92 to 94 propose amendments to section 139U of the Act which requires a bankrupt to give the trustee particulars of all income that was derived or is expected to be derived by each dependant of the bankrupt during the relevant assessment periods.

 

149      These amendments are consequential on that proposed by item 86 to be made to section 139K of the Act to allow a bankrupt’s dependant to earn an income of up to a prescribed amount and retain the status of dependant.

 

Trustee to notify bankrupt of review rights regarding hardship decisions

150      Item 95 proposes to amend subsection 139W(4) to require the trustee to give written notice to the bankrupt about the possibility of a variation, under section 139T on the grounds of hardship, of the bankrupt’s assessed contribution liability.

 

No time limit on making assessment

151      It is proposed by item 96 to amend the contribution provisions by inserting a new provision, section 139WA, under which it will be clear that there is no time limit for the trustee to make an assessment under section 139W or a fresh assessment under subsection 139W(2).  In particular, such an assessment may be made after the end of a contribution assessment period or after the bankrupt has been discharged from bankruptcy.  To avoid any doubt about the intended scope of the word ‘bankrupt’ in applying new subsection 139WA(1), proposed new subsection 139WA(2) provides that a reference in Division 4B of Part VI to ‘a bankrupt’ includes a reference to a former bankrupt.  The amending provision is intended to ensure that bankrupts gain no benefit from hindering the trustee’s ability to make an accurate assessment of the bankrupt’s liability to make a contribution under Division 4B of Part VI of the Act.

 

152      By transitional provision item 220, the amendments made by items 86 to 96 inclusive will apply to contribution assessment periods that begin after commencement.

 

Time limit for applying for review of assessment

153      Item 97 provides for a 60 day time limit on requests under paragraph 139ZA(3)(a) for a review of a trustee’s assessment of a contribution liability.  This limit is to facilitate the trustee’s prompt administration and finalisation of an estate.  By transitional provision item 214, the amendment made by this item will apply to the review of decisions made after commencement.

 

154      Item 98 proposes the amendment of subsection 139ZE(1) which requires the Inspector-General to notify both the bankrupt and the (registered) trustee of the Inspector-General’s decision on the review of an assessment made by a trustee.  The amendment proposes to omit references to a ‘registered’ trustee.  The result will be that the provision will apply both to a registered trustee and the Official Trustee.  The amendment recognises the Official Trustee as an entity quite separate from the Inspector-General. 

 

Review of assessment decisions

155      Item 99 proposes the repeal and replacement of section 139ZF with the effect of requiring bankrupts to utilise the internal review mechanism, ie, review by the Inspector-General, before seeking AAT review of a trustee’s contribution assessment.  Item 100 proposes an amendment consequential on the removal of that right of direct access to the AAT.  By transitional provision item 221, the amendments made by these 2 items will apply to the review of decisions made after commencement.

 

Repeal of Division 4C of Part VI

156      Item 101 provides for the repeal of Division 4C of Part VI of the Act.  That Division provides for a bankrupt who is liable to pay income contributions not to leave Australia without permission of the Court.  It is proposed to transfer the primary decision making in relation to such matters from the Court to the trustee of the bankrupt estate: see the notes on item 185.  By transitional provision item 222, the amendments made by this item will not affect the rights of bankrupts in relation to permission for overseas travel granted before commencement or sought before, but granted after, commencement.

 

157      Items 100 and 102 respectively propose minor drafting amendments of a technical nature to paragraph 139ZG(2)(c) and subsection 145(3).  No substantive change to the law is proposed by these amendments.

 

158      Item 103 proposes an amendment of subsection 149(1) to remove what will become an obsolete reference upon the repeal of the early discharge provisions.  By transitional provision item 206, this change will apply to bankruptcies for which the date of the bankruptcy is after commencement.

 

Bankruptcy extended when objection filed

159      Item 104 proposes to amend subparagraph 149A(2)(a)(i) to replace the subsection 149D(1)-based list of objection grounds which extend a bankruptcy by 5 years.  Each ground in the new list will constitute a special ground of objection: see the notes on items 109 to 114.

 

160      Item 105 proposes a minor drafting amendment to correct a drafting error.  It will make no change to the substantive law.

 

161      By item 106 an amendment is proposed to subsection 149A(3) of the Act, which sets out the effect of an objection being withdrawn or cancelled.  The amendment proposes to repeal subparagraph (3)(b)(iii) to remove reference to the early discharge provisions as their repeal will make them irrelevant in determining the effect of the cancellation or withdrawal of an objection.  By transitional provision item 206, this change will apply to bankruptcies for which the date of the bankruptcy is after commencement. 

 

162      Item 107 proposes to amend subsection 149B(1) to remove the Official Receiver’s power to file a notice of objection to discharge.  The filing of such an objection is not an Official Receiver function but, rather, a function of the trustee.  Item 108 proposes a consequential technical amendment. 

 

Objections to discharge

            - Background

163      The objection-to-discharge provisions of the Act allow a trustee to file an objection to the bankrupt’s discharge from bankruptcy.  A successful objection extends the standard period of bankruptcy by either 2 years or 5 years, depending on the grounds of the objection.  The grounds are specified in the Act.  They relate to various means by which a bankrupt’s non-cooperation with the trustee can frustrate the trustee’s efforts to administer the bankruptcy. 

 

164      When filing an objection, the trustee must set out the ground of objection, the facts relied on to support the ground and the reasons for filing an objection.  Case law establishes that punishing the bankrupt, of itself, is not a lawful reason.  The only valid reason for filing an objection has been held to be to advance the trustee’s administration of the bankruptcy.  This approach does not encourage bankrupts to cooperate with trustees.



            - S pecial grounds of objection

165      The amendments propose to address this weakness in the present law by identifying some existing grounds, and adding some new grounds, as “ special grounds” .   In these special ground cases, the trustee will not need to show that filing the objection will advance the administration, only that the special ground existed.  Therefore, if the grounds of objection include a special ground, only the facts supporting that special ground need to be established.  The special grounds are specified in paragraphs 149D(1)(ab), (d), (da), (e), (f), (g), (h), (ha), (k) and (ma).  Item 109 proposes that paragraph 149C(1)(c), which requires a trustee to state the reasons for objection to discharge, not apply regarding objections filed on special grounds.

 

             - New grounds of objection, including special grounds

166      Item 110 proposes the insertion of proposed new grounds of objection in subsection 149D(1).  They are: that any transfer is void against the trustee in the bankruptcy because of section 120 or 122 (new paragraph 149D(1)(aa)); and a new special ground - that any transfer is void against the trustee because of section 121 (new paragraph 149D(1)(ab). 

 

167      Items 111, 112 and 114 propose to add further, special grounds of objection.  Respectively, the items deal with the intentional provision by the bankrupt, after the date of bankruptcy, of false or misleading information to the trustee; and a bankrupt’s intentional failure to disclose to the trustee either a liability or the bankrupt’s beneficial interest in any property. 

 

168      By item 113,  failure to comply with the requirements of paragraphs 77(1)(bb) or (bc) will be a ground (but not a special ground) of objection.  By transitional provision item 213, the amendment made by this item will apply to failure to notify a change, referred to in those paragraphs, which occurs after commencement.

 

169      The amendment proposed by item 115 would amend subsection 149F(1) so that, when a notice of objection is filed by a trustee, the trustee must give a copy of it to the bankrupt, together with a notice to the effect that the bankrupt may request the Inspector-General to review the decision of the trustee to file a notice.  This removal of any reference to the AAT reflects the proposed requirement that a bankrupt must first access internal review before seeking external review.

 

170      The amendments proposed by items 116 to 120 inclusive are consequential upon the proposed withdrawal of the Official Receiver’s power to file an objection to the discharge of a bankrupt: see the notes on item 107.  By transitional provision item 223, the amendments made by items 116 to 120 will apply to objections filed after commencement.

 

171      Item 121 proposes the insertion of a 60 day time limit in which a bankrupt may apply, under paragraph 149K(3)(a), for a review of the trustee’s decision to object to the bankrupt’s discharge.  By transitional provision item 214, the amendment made by this item will apply to the review of decisions made after commencement.

 

172      Item 122 proposes an amendment consequential on the loss of the Official Receiver’s power to file an objection to the discharge of a bankrupt: see the notes on item 107.

 

173      Item 123 proposes a new subsection 149N(1A), under which an objection must not be cancelled if it specifies at least one special ground and there is sufficient evidence to support the existence of at least one such ground. 

Bankrupt’s conduct after ground commenced to exist must be ignored on review of objection

174      Trustees understandably are disconcerted when an objection filed by them has been cancelled by the AAT or the Court because, for example, immediately prior to a review hearing, the bankrupt has provided information long sought by the trustee.  By proposed new subsection 149N(1B), no notice is to be taken by a review tribunal or the Court when applying proposed new subsection 149N(1A), of any conduct of the bankrupt after the time when the ground concerned first commenced to exist. 

 

175      However, as a bankrupt may fail, for reasons beyond the bankrupt’s control, to comply with a duty imposed under the Act, the proposed amendment permits the Inspector-General to cancel an objection made on a special ground if the bankrupt establishes that there was a ‘reasonable excuse’ for the conduct or failure that constituted a special ground. 

 

176      By transitional provision item 252, the amendments made by items 122 and 123 will apply to objections filed after commencement.

 

Notifying Official Trustee of objection review decision

177      Section 149P obliges the Inspector-General to notify the bankrupt and the trustee about the outcome of the Inspector-General’s review of an objection decision or the Inspector-General’s refusal of a request for a review of the trustee’s decision to object to discharge.  Item 124 proposes an amendment to ensure that the provisions of subsection 149P(1) apply to the Official Trustee as well as to a registered trustee, by extending the notification obligation to cases where the Official Trustee is the trustee.

 

178      Item 125 proposes another amendment consequential on the loss of the Official Receiver’s power to file an objection to the discharge of a bankrupt: see the notes on item 133.  By transitional provision item 223, the amendment made by this item will apply to objections filed after commencement.

 

Internal review of objection decision required before external review accessible

179      Item 126 proposes the repeal and substitution of section 149Q to make clear that applications to the Administrative Appeals Tribunal can only be made for a review of a decision of the Inspector-General on the decision of a trustee to file an objection or a decision of the Inspector-General refusing a request to review a decision of the trustee to file a notice of objection.  This measure ensures that a bankrupt dissatisfied with such a decision must first seek review of it by the Inspector-General rather than seeking initial review of it by the Administrative Appeals Tribunal.  By transitional provision item 221, the amendment made by this item will apply to the review of decisions made after commencement.

 

Repeal of early discharge provisions

180      Item 127 proposes the repeal Division 3 of Part VII which is the division dealing with the early discharge of bankrupts from bankruptcy.  The effect of the amendment will be to repeal the early discharge provisions under which some bankrupts can obtain discharge from bankruptcy after 6 months.  By transitional provision item 206, this change will apply to bankruptcies for which the date of the bankruptcy is after commencement. 

 

Annulment on payment of debts to include payment of  interest

181      Item 128 proposes an amendment to subsection 153A(1) of the Act to make clear that annulment on the ground of full payment of the bankrupt’s debts requires, in relation to any debts that bear interest, interest reckoned up to and including the date on which the debt, including the interest, is paid.

 

Annulment of bankruptcy by Court whether or not petitioning debtor insolvent

182      By item 129 insertion of a new subsection in section 153B of the Act is proposed.  That section gives the Court power to annul a bankruptcy.  There is at present no test for insolvency in relation to a debtor’s petition filed under the Act and it is not proposed that, in the ordinary case, there be one.  However, the amendment will enable the Court to annul a bankruptcy even if the debtor is insolvent. 

 

183      Some debtors who petition for bankruptcy may be technically insolvent but could make arrangements to repay their debts: they choose not to while maintaining an expensive lifestyle.  Section 153B, as proposed to be amended, would make it quite clear that the Court can find that their petition is an abuse of process. 

 

184      A person, for example, might have an income of $400,000, no assets and owe one creditor (eg, the ATO) $500,000.  The creditor in such a situation would be able to argue that the bankruptcy should be annulled because the debtor has the capacity to pay the debt within a reasonable time but appears to have chosen not to pay it while continuing to enjoy a lifestyle which absorbs all of his or her (often) very substantial income.  The Court would not be able to rely on the person’s technical insolvency (inability to pay debts as they become due and payable) to dismiss the application. 

 

185      Items 130, 135 and 137 all propose an amendment which is consequential on the change of ITSA’s status from that of a Division of the Attorney-General’s Department to that of an executive agency under the Public Service Act 1999 .  Under the proposed changes, an ‘APS employee’ will be substituted for an ‘officer of the Department’ as a person who may form part of the membership of a committee convened to consider a person’s application for registration as a trustee under the Act, or the conditions applying to a trustee’s registration or whether or not a trustee should continue to be registered.  Note that items 5, 8, 50, 70 and 141 all propose to replace references to ‘officer of the Department’ with references to ‘authorised employee’.  This is to cater for the change of ITSA’s status.  The use of the term ‘APS employee’ rather than ‘authorised officer’ in the changes proposed by items 130, 135 and 137 is to provide a wider group of government officials from which a committee member can be drawn.

 

Registration of trustees

186      Item 131 proposes an amendment to subsection 155A(1) of the Act to allow a committee convened to decide whether an applicant should be registered as a trustee to require the applicant to sit for an exam in addition to the present compulsory interview.

 

187      Item 132 proposes to insert new subsection 155A(4A) which provides that an applicant should not be registered if the applicant does not have the ability (including knowledge) to perform satisfactorily the duties of a registered trustee.  An Administrative Appeals Tribunal has held that the current law permits a person to be registered as a trustee even if that person did not, at the time of registration, have that ability.  That decision was open to the Tribunal but the provision had not been intended to have that outcome.  Under the proposed amendment, it will be insufficient for an applicant to satisfy a committee that the applicant has a capacity to acquire the requisite ability and knowledge after they have been registered. 

188      By transitional provision item 226, the amendments made by items 131 and 132 will apply to registration applications made after commencement.

 

189      The effect of existing section 155D is that Inspector-General must extend a trustee’s registration for three years from the expiry of his or her current registration if the trustee applies in writing before the expiry of the registration and the person has paid the charge imposed by section 6 of the Bankruptcy (Registration Charges) Act 1997.  Items 133 and 134 propose to insert new subsections 155D(2) and (3) into the Act and to amend paragraph 155(D)(b).  Item 133 adds a further requirement to existing paragraph 155D(b) which is that any late payment penalty under proposed subsection 155D(3) has been paid.  The amendments proposed by item 134 would provide that the Inspector-General must not extend a trustee’s registration if the trustee owes more than $50 of charge under the Bankruptcy (Estate Charges) Act 1997 or of penalty under section 281 of the Act in respect of that charge.  This sanction can only be applied, however, if the Inspector-General has notified the person of the unpaid charge at least 14 days before the due date for payment of the charge under proposed new subsection 155D(3). 

 

190      Proposed new subsection 155D(3) changes the current arrangements in relation to the payment by trustees of their registration charge, ie, the payment which ordinarily will renew their registration as trustees for a further 3 years. 

 

191      At present, if a trustee’s payment is received after the expiry of the trustee’s current registration, the trustee is unregistered and must apply to the Court for an order that he or she be re-registered.  Such applications are costly and inconvenient for trustees.

 

192      To minimise the number and impact of such cases, the Bill proposes a revised arrangement whereby the charge payable for the extension of a trustee’s registration is to be due for payment one month before the date of expiry of that registration.  Further, if the charge is not paid by the due date, an additional amount equal to 20% of the charge is payable by the trustee by way of penalty. 

 

193      It is proposed that ITSA will alert trustees to the forthcoming expiry of their registration and, if the charge is not then paid by the due date, send a reminder to affected trustees that a 20% penalty has become applicable.  If, ultimately, the trustee does not pay the charge and the penalty before the expiry of his or her current registration, the by then unregistered trustee will have no option but to apply to the Court for re-registration. 

 

194      By transitional provision item 227, the amendments made by items 133 and 134 will apply to extensions of registration with an expiry date at least 3 months after commencement.

 

195      Item 136 proposes to insert in section 155H an additional ground for de-registration of a trustee.  That ground will be that the trustee no longer has the ability (including knowledge) to perform satisfactorily the duties of a registered trustee.  It is appropriate that this ground be added to those already appearing in subsection 155H(1) because trustees need to maintain their professional expertise so as to be able to continue to perform satisfactorily their duties as registered trustees. 

 

 

 

 

Minimum remuneration of registered trustee

196      Items 138 and 139 propose amendments to subsection 161B(1) to increase, by 8.4%, the minimum statutory trustee remuneration payable under the Act to take account of the impact of the GST and associated tax changes under the new tax system. 

 

197      Item 140 proposes the insertion of new subsection 162(6A) under which the trustee must, in relation to his/her remuneration, give such notices to the bankrupt and creditors as are required by the regulations.  It is intended that the regulations will require that the bankrupt and creditors be given adequate information about a trustees’ remuneration and also notified of the rights of the bankrupt and creditors to seek to have that remuneration taxed if they are dissatisfied with its amount. 

 

Remuneration of successive trustees

198      Item 141 amends section 164 by substituting ‘authorised employee’ for ‘officer of the Department’ to reflect ITSA becoming an executive agency.

 

Time limit for review applications under section 178

199      Item 142 proposes an amendment to section 178 of the Act to insert a 60 day time limit in which an application may be made to the Court for a review of a trustee’s act, omission or decision.  At present, no time limit is specified: some bankrupt’s have applied to the Court for a review many years after the act, omission or decision concerned.  This is both inconvenient and costly for trustees: setting a time limit will allow a reasonable period for persons to seek review under section 178.  By transitional provision item 214, the amendment made by this item will apply to the review of trustee decisions made after commencement.

 

Streamlined method for replacing trustee

200      Item 143 proposes a streamlined method for replacing a trustee under the Act.  Proposed new section 181A will allow the trustee of a bankrupt’s estate to notify creditors of a proposal to replace the trustee, providing the new trustee has consented.  If no creditor lodges a written objection within the specified time, the change of trustee takes place on the date specified in the notice.  If a creditor does object, a meeting will be called and the matter decided in accordance with current voting rules.  The new trustee is treated as having been appointed by the creditors and therefore has the same powers as if he/she had been appointed by them under section 157 of the Act.

 

201      The effect of proposed evidentiary provision subsection 181A(6) is that a trustee’s signed certificate as to any matter relating to a section 181A proposal is to be prima facie evidence of the matter.

 

202      By transitional provision item 229, the amendments made by item 143 will apply to all bankruptcies, including those for which the date of bankruptcy is before commencement.

 

Official Receiver to process debt agreement proposals

203      Items 144 to 149 inclusive, items 151 and 153, and items 155 to 166 inclusive, all propose minor drafting changes to sections in Part IX of the Act, ie, the Part which deals with debt agreements.  The proposed changes are a recognition that the processing of debt agreement proposals is more appropriately an Official Receiver function than an Official Trustee function.  By transitional provision item 230, the amendments made by all these items will apply to debt agreements in force at commencement and those made thereafter.  Item 167, which proposes to repeal a note to section 185Y, will apply in the same way.

 

Raising the income threshold for debt agreements by 50%

204      Item 150 proposes to raise the present income threshold for debt agreement proposals by 50%.  This measure will enable more people to enter into an arrangement with creditors and thereby avoid bankruptcy.  By transitional provision item 231, the amendment made by this item will apply to debt agreement proposals given after commencement.

 

205      Item 151 proposes to insert subsection 185D(2) to extend to debtors who make debt agreement proposals the right that the Bill proposes that bankrupts will enjoy: to access, for no fee, their own statement of affairs: see the notes on item 27.

 

Oversight of debt agreement administrators

206      Item 152 provides that the Official Receiver must refuse to accept a debt agreement proposal for processing if the person nominated in it as administrator is ineligible in accordance with the regulations to act as an administrator. 

 

207      The debt agreement mechanism inserted in the Act in 1996, was introduced as a low-cost, simple process under which a debt agreement administrator could be any person, such as a debtor’s friend or family member, and need hold no formal qualifications. 

 

208      Whilst it is desirable, as far as possible, to continue to maintain this informal approach, the vast majority of debt agreements are administered by persons who do so as a business.  It therefore is appropriate for a regulatory regime - but less detailed than that provided in the Act in relation to registered trustees - to be established.  It is proposed that the regulations will provide criteria under which certain persons will be ineligible to be nominated as debt agreement administrators in debt agreement proposals. 

 

209      By transitional provision item 232, the amendment made by this item will apply to debt agreement proposals given after commencement.

 

Notification of death of administrator

210    The Act requires that if a registered trustee dies, the Official Receiver is to be notified of the death (subsection 182(4)) and that the Official Trustee act as replacement trustee (section 160).  However, the Act is silent on what happens if a debt agreement administrator dies. Item 168 proposes the insertion of new sections 185ZA to 185ZD to rectify this deficiency. 

 

211      Proposed new section 185ZA would provide that, upon an administrator’s death, the person administering their estate must promptly and in writing notify the fact of death to the Official Receiver for the District in which the debt agreement administrator was ordinarily resident.  The sanction for failure to notify is proposed to be one penalty unit, the same as the sanction for failure to notify a registered trustee’s death. 

 

Official Receiver to replace an administrator who dies

212      Proposed new section 185ZB provides for an Official Receiver to be appointed by the Inspector-General as the replacement administrator of the unexpired debt agreements.  The Official Receiver must notify the parties to uncompleted debt agreements about the death, that the Official Receiver is the replacement administrator and (if applicable) that the Official Receiver intends to appoint another administrator. 

 

Official Receiver may appoint a new administrator

213      By proposed new section 185ZC, the appointed Official Receiver will be able to appoint another person as the replacement administrator.  This proposed change would allow the Official Receiver to transfer ‘inherited’ administrations to a debt agreement administrator.  This is expected to be the usual outcome, as the great majority of agreements are administered by the private sector.

 

Remuneration of administrator

214      Finally, proposed new section 185ZC would allow any replacement  private sector administrator to be remunerated according to the terms of any ‘inherited’ agreement.

 

Oversight of controlling trustees who are solicitors

215      In a similar vein to the change proposed by item 154, item 169 proposes the insertion of subsections 188(2A) and (2B) under which the regulations may prescribe the circumstances in which a person other than the Official Trustee or a registered trustee is ineligible to act as a controlling trustee under Part X of the Act.

 

216      There is evidence that some controlling trustees who are solicitors have been performing that role in an unsatisfactory and unprofessional manner.  Taking court action against them is costly and time-consuming.  It therefore is intended by this measure that solicitor controlling trustees will be subject to regulation by the Inspector-General, just as registered trustees and the Official Trustee already are.  A controlling trustee solicitor’s failure to meet eligibility conditions prescribed in the regulations will make him or her ineligible to act as a controlling trustee.  By transitional provision item 233, the amendment made by this item will apply to section 188 authorities signed after commencement and which appoint a solicitor as a controlling trustree.

 

Notification of cessation of control as controlling trustee

217      Item 170 proposes an amendment to section 189 of the Act so that a trustee will be required to notify the Official Receiver in writing within 7 days after becoming aware that his or her control has ended because of an event specified in subsection 189(1A).  The purpose of this amendment is to ensure that the National Personal Insolvency Index can be kept up-to-date.  By transitional provision item 234, the amendment made by this item will apply where the control ends after commencement.

 

218      The amendments proposed by items 171 and 172 delete redundant references to section 198, a section repealed in 1996.  Similarly, item 173 proposes to correct an incorrect reference to subsection 188(2) in paragraph 222(4)(b) of the Act by substituting a correct reference to section 188A. 

 

Validation of acts of Part X trustee acting in good faith

219      Section 224 of the Act validates the acts of trustees or any other persons who have entered into transactions in good faith under a Part X arrangement without being aware that the arrangement has been voided or terminated under the provisions of the Act.  The amendments proposed by items 174 and 175 will extend references in paragraphs 224(c) and 224(d) to include references to proposed new sections under which Part X arrangements can be terminated: see the notes on items 177 and 178 for an explanation of the new proposed provisions referred to in items 174 and 175.  By transitional provision item 212, the changes proposed by all these 4 items will apply to Part X arrangements made after commencement.  Also, by that transitional item, a Part X composition or scheme of arrangement will be made when it is accepted by creditors, and a deed of arrangement will be made when it is executed. 

 

220      Item 176 would amend an incorrect reference in subsections 226(1) and (2) of the Act to subsection 188(2) and substitute a correct reference to section 188A.

 

Variation of deed of arrangement

221      Item 177 proposes the insertion of new sections 234A and 234B into the Act.  Under those sections, it will be possible for a Part X deed of arrangement to be varied by a special resolution of creditors or by the trustee (new section 234A) or for a deed of arrangement to be terminated by the trustee (new section 234B). 

 

222      The variation of deeds of arrangement may be effected by the creditors, with the written consent of the debtor, by special resolution at a meeting called for the purpose (new subsection 234A(1)). 

 

223      Similarly, with the debtor’s written consent, a trustee may in writing propose a variation of a deed of arrangement (new subsection 234A).  The trustee would give notice of the proposed variation to the creditors, state why the variation is being proposed and what its likely impact on creditors will be if it is approved.  If no creditor lodges a written notice of objection, the proposed variation takes effect on the date specified in the notice.  No vote of creditors is required.  A creditor who objects to the proposal, or to it being dealt with other than by a creditors’ meeting, can lodge with the trustee a written notice of objection.

 

224      The effect of proposed evidentiary provision subsection 234A(6) will be that a trustee’s signed certificate as to any matter relating to a section 234A proposal is to be prima facie evidence of the matter.

 

Termination of deed of arrangement by trustee

225      Proposed new section 234B provides a comparable mechanism for terminations of deeds of arrangement.  The notification procedure is the same as in subsections 234A(2) to (4), except that it requires that the debtor be in default under the deed of arrangement before a termination can take place.  By subsection 234B(5), the debtor is in default if the debtor has failed to carry out or failed to comply with a provision of the deed or, if the debtor has died, the debtor or the person administering the deceased estate of the debtor has failed to carry out or comply with a provision of the deed.  Subsection 234B(5) is modelled on existing paragraph 236(1)(a) of the Act. 

 

226      The effect of proposed evidentiary provision subsection 234B(6) will be that a trustee’s signed certificate as to any matter relating to a section 234B proposal is to be prima facie evidence of the matter.

 

Variation of composition

227      Item 178 proposes the insertion of new sections 240A and 240B which would deal with the variation of a Part X composition or the termination, at the instigation of the trustee, of a Part X composition.

 

228      The provisions of proposed new section 240A parallel, in relation to the variation of a composition, the provisions proposed to be inserted by new section 234A in relation to the variation of a deed of arrangement: see the notes on item 177. 

 

Termination of composition by trustee

229      Similarly, the provisions of proposed new section 240B parallel, in relation to the termination of a composition by a trustee, the procedure set out in proposed new section 234B regarding the termination of a deed of arrangement by a trustee: see the notes on item 177 as they relate to proposed new section 234B.  In relation to the termination of a composition by a trustee, proposed subsection 240B(5) sets out when a debtor is to be regarded as in default .  However, in this case new subsection 240B(5) is modelled on paragraph 242(1)(a) of the Act.

 

Offence of incurring further debts: threshold amount repealed

230      Item 179 proposes to amend subsection 265(8) of the Act to omit the words ‘of an amount of $500 or upwards’.  This amendment has the effect of removing any threshold for the commission of the offence of incurring debts within 2 years before bankruptcy without having, at the time of contracting the debts, any reasonable or probable ground of expectation, after taking into consideration the debtor’s other liabilities (if any), of being able to pay the debt. 

 

231      The removal of the $500 threshold for this offence aligns the bankruptcy law with the Corporations Law which has no such threshold regarding a comparable offence.  By transitional provision item 235, the amendment made by this item will apply to debts contracted after commencement.

 

232      Each of the amendments proposed by items 180 to 182 proposes to omit a reference to section 77B in the offence provisions in section 265A of the Act.  These omissions are consequential on the repeal of section 77B of the Act proposed by item 71 of the Bill.  By transitional provision item 203, these changes will apply to bankruptcies for which the date of the bankruptcy is after commencement. 

 

233      Item 183 proposes the repeal of paragraph 272(ba) because of the repeal of Division 4C Part VI (see item 127), and item 184 proposes an amendment consequential upon the proposed repeal of paragraph 272(ba) of the Act.

 

234      Consistently with the effective transfer from the Court to the trustee of the power to permit a debtor or bankrupt to travel overseas, item 185 proposes to insert new subsections 272(2) and (3).  By those subsections, if a bankrupt is liable to make a contribution to the trustee under the contribution scheme, the trustee may impose written conditions when permitting the bankrupt’s to travel overseas.  A contravention by the bankrupt of any conditions imposed by the trustee is an offence and, under subsection (3), is punishable on conviction by imprisonment for a period not exceeding 1 year.  By transitional provision item 222 , the amendments made by items 184 to 185 will not affect the rights of bankrupts in relation to permission for overseas travel granted before commencement or sought before, but granted after, commencement.

 



Applications for more time to pay charge amounts

235      Item 186 proposes an amendment to paragraph 282(2)(b) of the Act to require that a person who seeks an extension of time to pay interest charge or realisations charge is to apply for that extension before the original time for payment.  By transitional provision item 236, the amendment made by this item will apply to applications made after commencement.

 

Hardship test to become ‘undue hardship’

236      Item 187 proposes an amendment of paragraph 283(1)(a) of the Act to insert the word “undue” before “hardship” so that the Inspector-General, when considering whether to remit an amount of interest charge, realisations charge or late payment penalty that is payable but has not been paid, may consider both whether failure to remit the amount would cause a person undue hardship and whether it is appropriate to remit the amount.  The existing test of “hardship” in paragraph 283(1)(a) has been distinguished by the Administrative Appeals Tribunal (AAT) from the test of “undue hardship” set out in regulation 16.10(2)(a) of the Bankruptcy Regulations.  The AAT took the view that the section 283 test was more liberal than that called for by the regulations.  It is considered appropriate that the Act and the regulations use an identical test of hardship in this context and that it be the test of “undue hardship” rather than simply “hardship”.  By transitional provision item 237, the amendment made by this item will apply where the application for remission is made to the Inspector-General after commencement.

 

237      Items 188 and 189 propose amendments which are consequential on the repeal of the early discharge provisions of the Act.  References in section 304A to provisions within those early discharge provisions will become redundant and are proposed to be omitted.  By transitional provision item 206, these changes will apply to bankruptcies for which the date of the bankruptcy is after commencement.

 

Scope of section 305 extended to Part X arrangements

238      Section 305 of the Act sets out a scheme where trustees of a bankrupt estate may seek Commonwealth assistance, if monies in the estate are insufficient for the purpose, to institute, continue or defend proceedings in relation to the estate of the bankrupt, the examinable affairs of the bankrupt or other matters specified in the section.  Trustees from time to time have made representations that the scope of the section should be extended to trustees under Part X of the Act. 

 

239      The amendment proposed by item 190 would remove the capacity of an Official Receiver to seek assistance under section 305 and allow a new category of trustee, ie, a trustee under Part X in relation to a debtor, to seek assistance under the section. 

 

240      The amendments proposed by items 191 to 196 inclusive make consequential drafting amendments following that proposed by item 190 and to reflect the fact that, in a Part X matter, the trustee is handling the affairs of a debtor and not the affairs of a bankrupt.

 

241      Item 197 proposes an amendment to section 305 to define what is to constitute an estate in section 305.  By proposed paragraph 305(4)(a), estate , in relation to a Part X deed of assignment, will mean the property that is vested in the trustee under the deed; in relation to a Part X deed of arrangement, the term will have the same meaning but will extend also to property that is available or may become available to the trustee under the deed; and, in relation to a Part X composition, it will mean the property that is available or may become available to the trustee under the composition.

 

Part 2—Transitional provisions.

 

242      As noted in relation to section 3 of the Bill, the notes on the Schedule items in Part 1 include notes on the transitional and application items.  These items extend from item 198 to item 237 inclusive.

 

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