Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Bankruptcy Amendment (Enterprise Incentives) Bill 2017



Download PDFDownload PDF

ISSN 1328-8091

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest.

BILLS DIGEST NO. 1, 2018-19 10 JULY 2018

Bankruptcy Amendment (Enterprise Incentives) Bill 2017 Liz Wakerly Economics Section

Contents

Purpose of the Bill ........................................................... 2

Structure of the Bill ......................................................... 2

Background ..................................................................... 2

Proposed reforms ........................................................ 3

Reduced bankruptcy period and other possible reforms ........................................................................ 4

International experience ............................................. 5

Committee consideration ................................................ 6

Senate Legal and Constitutional Affairs Committee ................................................................... 6

Senate Standing Committee for the Scrutiny of Bills .............................................................................. 7

Policy position of non-government parties/independents...................................................... 8

Position of major interest groups..................................... 8

Financial implications .................................................... 10

Statement of Compatibility with Human Rights.............. 10

Parliamentary Joint Committee on Human Rights ... 10 Key issues and provisions .............................................. 10

Part 1 - Amendments ............................................... 11

Part 2 - Application and transitional provisions ....... 13 Concluding comments ................................................... 14

Date introduced: 19 October 2017

House: Senate

Portfolio: Attorney-General

Commencement: Sections 1-3, on Royal Assent; Schedule 1, six months after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at July 2018.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 2

Purpose of the Bill The purpose of the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (the Bill) is to amend the Bankruptcy Act 1966 (the Act) to reduce the default period of bankruptcy from three years to one year. The amendments also include measures to extend the income contribution obligations of discharged bankrupts for a minimum period of two years following discharge or, if extended due to non-compliance, for five to eight years.

Structure of the Bill The Bill is comprised of one Schedule in two Parts.

Part 1 of Schedule 1 to the Bill contains amendments to the Act to reduce the default period of bankruptcy from three years to one year.

Other amendments in Part 1:

• extend the income contribution obligations for discharged bankrupts for a minimum two year period following discharge (or, if bankruptcy is extended due to non-compliance, for a period of five to eight years) and

• ensure that persons who are under an obligation to notify a change in contact details continue to do so.

Part 2 of Schedule 1 contains application and transitional provisions. These include provisions to clarify how the amendments, once introduced, will apply to persons who are currently undischarged bankrupts.1

Background In Australia, corporate insolvency is governed by the Corporations Act 2001 (Cth) while personal insolvency is regulated under the Act.2

If an individual is unable to pay their debts and cannot come to an arrangement with creditors, there are two options for them to enter bankruptcy:

• the debtor may choose to initiate bankruptcy by filing a debtor’s petition with an Official Receiver through the Australian Financial Security Authority (AFSA)3 (voluntary bankruptcy) or

• a creditor may take action to have the debtor declared bankrupt by order of the court (only available if aggregate debts exceed $5,000) (involuntary bankruptcy).4

When an individual is declared bankrupt, a trustee is appointed to administer the bankruptcy process. In both voluntary and involuntary bankruptcy, bankrupt persons (bankrupts) must complete and lodge a statement of affairs which includes a list of all debts. Bankrupts are required to provide any books to the trustee, along with their passport and to assist in the bankruptcy process ‘to the utmost of his or her power’.5 In addition, a number of restrictions are imposed on bankrupts:

1. Explanatory Memorandum, Bankruptcy Amendment (Enterprise Incentives) Bill 2017, p. 7. 2. Note: the related Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, which made amendments to the Corporations Act received Royal Assent on 18 September 2017. These amendments created a ‘safe harbour’ for directors from personal liability for insolvent trading if the company is undertaking a restructure outside formal insolvency and made ‘ipso

facto’ clauses in contracts unenforceable while a company is restructuring. See J Murphy, Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, Bills digest, 33, 2017-18, Parliamentary Library, Canberra, 2017. 3. Australian Government, Australian Financial Security Authority website. 4. Productivity Commission (PC), Business set-up, transfer and closure, Inquiry report, 75, 30 September 2015, p. 327. 5. Section 77, Bankruptcy Act 1966.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 3

• bankrupts are forbidden to travel overseas without first obtaining permission from the trustee

• bankrupts are required to disclose their bankruptcy if applying for any form of credit above an indexed amount ($5,703 as at 26 April 20186)

• the bankruptcy will be identified on a permanent public record, the National Personal Insolvency Index (NPII)7

• many professional organisations and licensing authorities impose conditions and limitations on bankrupts

• bankrupts are prevented from administering trust accounts without permission of the court and

• the Corporations Act prohibits bankrupts from acting as the director or manager of a corporation during the bankruptcy period.8

Where a bankrupt’s after-tax income exceeds a set amount, they must pay half of any excess income to their trustee (for distribution to their creditors) for the duration of their bankruptcy. This income threshold can be increased if there are exceptional circumstances or if the bankrupt has dependants.9

Bankruptcy can end through either discharge or annulment. Currently, a bankrupt will automatically be discharged from bankruptcy if three years have passed since a statement of affairs was filed.10 This period can be extended to either a five or eight year period if the trustee objects to the discharge (with the grounds for objection stipulated in section 149D of the Act). Once the bankruptcy period is considered terminated, the bankrupt may still be liable to pay some debts (incurred after the bankruptcy period began) but is otherwise free of restrictions and pre-existing debts.11

Bankruptcy rates have been falling in Australia since 2009. Between 2007-08 and 2015-16, most personal bankruptcies were experienced by persons in traditional blue collar occupations (machine operators, drivers and labourers), with 62 per cent reporting unsecured liabilities of less than $50,000.12 Data on Australian bankruptcies suggest that those who have never been bankrupt previously incur more debt than those who have been bankrupt at least once before. Unemployment, or loss of income, has been reported as the single most common cause of personal bankruptcy.13

Proposed reforms In November 2014, the then Treasurer, Joe Hockey, requested the Productivity Commission (PC) ‘undertake an inquiry into barriers to business entries and exits and identify options for reducing

6. Australian Government, ‘Indexed amounts’, AFSA website. 7. Australian Government, ‘National Personal Insolvency Index (NPII)’, AFSA website. 8. Subsection 206B(3) of the Corporations Act 2001. PC, Business set-up, transfer and closure, op. cit., p. 328. 9. AFSA, Income contributions: official trustee practice statement 1, AFSA, last updated 4 August 2016, pp. 3-5. 10. Until 2003, debtors could apply for early discharge of bankruptcy after a period of six months. These provisions were removed

from the Bankruptcy Act in 2003 due to concerns that bankruptcy was ‘too easy’ (Explanatory Memorandum, Bankruptcy Legislation Amendment Bill 2002). Amendments to reduce the automatic discharge period to 12 months were proposed in 2009 but not introduced. 11. AFSA, The end of a bankrupt’s period of bankruptcy: official trustee practice statement 4, AFSA, last updated 1 September 2017, pp. 3-10. 12. P Ali, M Anderson, L O’Brien and I Ramsay, ‘The incidence and causes of personal bankruptcy in Australia’, JASSA - The Finsia Journal of Applied Finance, 4, 2016, pp. 27-35. 13. Ibid.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 4

these barriers where appropriate, in order to drive efficiency and economic growth in the Australian economy’ (the PC inquiry).14

The PC inquiry report considered that an extended period of bankruptcy may have negative economic consequences by encouraging the use of limited liability company structures or by increasing the ‘risk tolerance’ required by individuals considering starting a business. It noted bankruptcy legislation that does not ‘excessively penalise’ business failure could improve productivity by ensuring that valuable resources are not trapped in inefficient firms.15

Among the key findings of the PC inquiry report - designed to reduce the stigma attached to bankruptcy and encourage entrepreneurs to start new businesses - were recommendations to:

• reduce the default exclusion period and restrictions on bankrupt persons in relation to access to finance, employment and overseas travel from three years to one year (where no offence has occurred)

• allow the trustee and courts to retain the power to extend the exclusion period to a maximum of eight years (if there are concerns regarding the bankrupt person’s conduct) and

• continue the obligation of bankrupt persons to make excess income contributions for three years or until bankruptcy discharge.16

Reforms to bankruptcy law, intended to foster entrepreneurial behaviour and reduce the stigma associated with bankruptcy, were announced by the Government on 7 December 2015 as part of the National Innovation and Science Agenda (NISA).17 As one of three measures aimed at ‘reducing the stigma associated with business failure and striking a better balance between encouraging entrepreneurship and protecting creditors’, the Government agreed to reduce the current default bankruptcy period from three years to one year.18 Public consultation by the Treasury on the proposals occurred between 29 April 2016 and 27 May 2016 as part of the NISA ‘Improving bankruptcy and insolvency laws’ discussion paper.19

In May 2017, the Australian Government response to the PC inquiry report supported the recommendations to reduce the default bankruptcy period from three years to one year and continue the obligation of bankrupts to make excess income contributions to the trustee for three years.20

Reduced bankruptcy period and other possible reforms Reducing the period of bankruptcy is one of a range of possible reforms. The extent to which personal insolvency regimes limit entrepreneurs’ ability to start new businesses in the future can be driven by the availability of a ‘fresh start’ - the exemption of future earnings from obligations to repay past debt due to liquidation bankruptcy.21 The availability of a fresh start can reduce the costs and stigma of failure associated with bankruptcy, which is one of the commonly cited

14. PC, Business set-up, transfer and closure, op. cit., p. iv. 15. Ibid., pp. 335-6. 16. Ibid., p. 41. 17. Australian Government, National Innovation and Science Agenda website. See Explanatory Memorandum, Bankruptcy

Amendment (Enterprise Incentives) Bill 2017, p. 2. 18. K O’Dwyer (Minister for Small Business and Assistant Treasurer) and G Brandis (Attorney-General), Consultation on improving bankruptcy and insolvency law, media release, 29 April 2016. 19. The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, Consultation, The

Treasury website, 26 May 2016. 20. Australian Government, Australian Government response to the Productivity Commission Inquiry into business set-up, transfer and closure, The Treasury website, May 2017, p. 32. 21. M Adalet McGowan and D Andrews, Insolvency regimes and productivity growth: a framework for analysis, OECD Economics

Department Working Paper, 1309, 21 July 2016, p. 29.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 5

barriers to entrepreneurship. In 2014, for example, nearly 40 per cent of 18-64 year olds in Australia cited the fear of failure as an obstacle to setting up a business.22

The predicted benefits of shorter bankruptcy periods include:

• overcoming risk averse behaviour and encouraging entrepreneurs to re-enter a market23 and

• reducing the disparity in employment restrictions on bankrupts across jurisdictions and occupations.24

On the other hand, reducing the default period of bankruptcy:

• may lead to an increase in objections to discharge (particularly in relation to failure to pay contributions given the shorter time frame)25

• may result in more borrowing and consequently more defaults, more bankruptcy and higher borrowing costs26

• ignores the typical causes of personal insolvency in Australia - unemployment and excessive use of credit, rather than carrying on a business27 and

• is likely to have little effect on the restrictions for bankrupts which currently exist under Australian law and professional association rules and which add to the stigma of bankruptcy in employment and business.28

It has been argued that few practical steps have been taken to implement any measurable financial education, during, or post, bankruptcy, in Australia and elsewhere.29 Without effective rehabilitation, a ‘fresh start’ may not deliver economic success, particularly where shorter discharge periods return bankrupts to the financial market relatively quickly. Specific education measures, such as mandatory financial literacy education, may be more productive in reducing the incidence of bankruptcy long term.30

Alternative reform measures designed to reduce the stigma of bankruptcy include:

• a review of the continuing need for entry barriers to occupations or professions based on bankruptcy

• changes to the accessibility or public record permanency of the NPII and

• categorising bankrupts according to their level of indebtedness to income, ownership of property and number of bankruptcies.31

International experience An OECD Working Paper, which explored the impact of insolvency regimes on the survival of zombie firms (firms that would typically exit in a competitive market) and capital misallocation,

22. Ibid., p. 30. 23. M Quilter, ‘Bankruptcy discharge: origins and liberalisation’, Insolvency Law Journal, 25(3), October 2017, pp. 107-126, p. 107. 24. The PC recommended that the Australian Government work with other governments and professional bodies to ensure that any such restrictions are justified according to specific policy objectives.

25. The PC argued that, even if the frequency of extensions rose sharply, the new system would still represent a more tailored approach (PC, Business set-up, transfer and closure, op. cit., p. 339). Any extension to a restriction period should be recorded on the NPII.

26. M Quilter, ‘Bankruptcy discharge: origins and liberalisation’, op. cit., p. 115. 27. J Dickfos and C Brown, ‘Reducing bankruptcy to 12 months ignores realities of insolvency’, The Conversation, 15 June 2016. 28. Ibid. 29. M Quilter, ‘Bankruptcy discharge: origins and liberalisation’, op. cit., p. 114. 30. J Dickfos and C Brown, ‘Reducing bankruptcy to 12 months ignores realities of insolvency’, op. cit. 31. J Dickfos and C Brown, ‘Reducing bankruptcy to 12 months ignores realities of insolvency’, op. cit.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 6

provides a summary of time to discharge across countries.32 In a survey of 38 countries, eight countries had time to discharge of less than or equal to one year, 15 countries had time to discharge of between one and three years (including Australia), and the remaining 15 countries had time to discharge greater than three years.33 Earlier OECD research noted that cross-country evidence suggests that entrepreneur-friendly insolvency laws can increase self-employment rates, small business owners’ use of insolvency proceedings and firm entry rates and can attract ‘better’ entrepreneurs.34

In 2004, the United Kingdom (UK) altered its bankruptcy laws to reduce the exclusion period from three years to one year as a means of removing the stigma of bankruptcy and to encourage failed entrepreneurs to attempt new business ventures. Evaluations of the reforms by the UK Government Insolvency Service in 2007 indicated that they provided some benefits, including playing a ‘small part’ in encouraging business set up.35 However, the reforms did not appear to immediately influence the ‘fear of failure’ or a bankrupt’s ability to start trading again.36 In considering these reforms, the PC observed that this outcome was ‘to be expected as commercial behaviour and culture takes time to fully incorporate legal reforms’.37

Committee consideration

Senate Legal and Constitutional Affairs Committee On 30 November 2017, the Senate Standing Committee for the Selection of Bills recommended the Bill be referred to the Senate Legal and Constitutional Affairs Legislation Committee for inquiry and report by 19 March 2018.38

The Senate Legal and Constitutional Affairs Committee issued its report on the Bill on 16 April 2018.39 The Committee noted and shared the concerns raised by submitters in relation to the proposed reduction of the default period.40 In particular, the Committee recommended that the Government ‘give positive consideration’ to a suggestion by the Australian Securities and Investments Commission (ASIC) that section 201A of the Corporations Act (which sets out the minimum number of directors for proprietary and public companies) be amended so that a person ‘made bankrupt within the last three years cannot be included for the purpose of satisfying the minimum director requirement’.41 ASIC explained that the effect of this proposed amendment would be:

 bankrupt persons would, consistent with the objectives of the Bill, be able to act as directors within 12 months, upon discharge; but

32. M Adalet McGowan, D Andrews and V Millot, Insolvency regimes, zombie firms and capital reallocation, OECD Economics Department Working Paper, 1399, 28 June 2017. 33. Adalet McGowan et al, Insolvency regimes, zombie firms and capital reallocation, op. cit., p. 37. 34. M Adalet McGowan and D Andrews, Insolvency regimes and productivity growth: a framework for analysis, op. cit., p. 28.

Note that comparisons with other countries (particularly the UK) may not be always appropriate, given the differing levels of consumer-related debt. 35. UK Insolvency Service, Enterprise Act 2002 - the personal insolvency provisions: final evaluation report, The Insolvency Service website, November 2007. 36. UK Insolvency Service, Enterprise Act 2002 - the personal insolvency provisions: final evaluation report, op cit., p. 7. 37. PC, Business set-up, transfer and closure, op. cit., p. 337. 38. Senate Standing Committee for the Selection of Bills, Report, 14, 2017, The Senate, Canberra, 30 November 2017, p. 1. 39. Senate Standing Committee on Legal and Constitutional Affairs, Bankruptcy Amendment (Enterprise Incentives) Bill 2017 [and]

Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, The Senate, Canberra, 16 April 2018. 40. Ibid., p. 39. 41. Australian Securities and Investments Commission (ASIC), Submission to the Senate Standing Committee on Legal and

Constitutional Affairs, Inquiry into the Bankruptcy Amendment (Enterprise Incentives) Bill 2017, 30 January 2018, p. 3.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 7

 the management of the company would be shared with at least one third party who would (by virtue of also being a director) also be responsible for the company's actions and be subject to the care and diligence obligations set out at s.180 Corporations Act;

 the activities of the ex-bankrupt person may be subject to some degree of supervision; and

 the ex-bankrupt person will have three years (as currently) to acquire the skills and training that may be necessary to be the sole director of a proprietary company. 42

Subject to the recommendation in relation to ASIC’s proposed amendment, the Committee recommended that the Bill be passed.43

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills (Scrutiny Committee) considered the Bill in its Scrutiny Digest of 15 November 2017.44 The Scrutiny Committee highlighted a proposed amendment to existing subsection 80(1) of the Act, which contains requirements for bankrupts to inform trustees concerning their contact information. It noted that a breach of the requirement in the existing subsection and the proposed subsection would be a strict liability offence which is subject to a penalty of up to six months imprisonment.45 The Scrutiny Committee commented:

[w]hen a bill states that an offence is one of strict liability, this removes the requirement for the prosecution to prove the defendant's fault. In such cases, an offence will be made out if it can be proven that the defendant engaged in certain conduct, without the prosecution having to prove that the defendant intended this, or was reckless or negligent. As the imposition of strict liability undermines fundamental criminal law principles, the committee expects the explanatory memorandum to provide a clear justification for any imposition of strict liability… .

46

The Scrutiny Committee noted that the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers (the Guide) states that the application of strict liability is only considered appropriate where:

• the offence is not punishable by imprisonment

• the offence is punishable by a fine of up to 60 penalty units for an individual

• the punishment of offences not involving fault is likely to significantly enhance the effectiveness of the enforcement regime in deterring certain conduct and

• there are legitimate grounds for penalising persons lacking fault.47

The Scrutiny Committee reiterated its ‘long-standing scrutiny view that it is inappropriate that strict liability is applied in circumstances where a period of imprisonment may be imposed’.48 It stated:

[i]n this instance, the explanatory memorandum does not explain that this offence is subject to strict liability, and so does not address the appropriateness of making the offence subject to up to six months imprisonment in circumstances where strict liability applies to the offence.

42. Ibid. 43. Senate Standing Committee on Legal and Constitutional Affairs, Bankruptcy Amendment (Enterprise Incentives) Bill 2017 [and] Bankruptcy Amendment (Debt Agreement Reform) Bill 2018, op. cit., p. 40. 44. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 13, 2017, The Senate, 15 November 2017, p. 4. 45. Ibid., p. 4. 46. Ibid., pp. 4-5. 47. Attorney-General’s Department, A guide to framing Commonwealth offences, infringement notices and enforcement powers,

September 2011, p. 23. 48. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 13, 2017, op. cit., p. 5.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 8

The committee therefore requests the Minister's advice as to the appropriateness of making an offence (for a bankrupt failing to notify of a change in contact details) subject to up to six months imprisonment where strict liability applies to the offence. 49

The Attorney-General responded to the Scrutiny Committee on 4 December 2017. He acknowledged that the drafting of the current and proposed subsection 80(1) did not comply with the Guide and indicated that he would seek to amend that part of the Bill to ‘ensure compliance with the Guide’.50

Policy position of non-government parties/independents At the time of writing, non-government parties and independents had not commented publicly.

Position of major interest groups Submissions made to the Senate Legal and Constitutional Affairs Legislation Committee inquiry into the Bill and the Treasury consultation process on improving bankruptcy and insolvency laws contained a range of views concerning proposals to reduce the bankruptcy period.51

For example, the Australian Bankers’ Association (ABA) has ‘reservations concerning the government’s decision to reduce the default period of bankruptcy from three years to one year’.52 The ABA referred to experience in the UK, where a reduction in the period of bankruptcy led to a significant increase in the number of personal bankruptcies. It also argued that a one year bankruptcy period is insufficient time to investigate the circumstances of a debtor.53 Similarly, the view of the Australian Shareholders’ Association in a submission to the Treasury consultation process was that one year is too short.54

Submissions from the ABA, Chartered Accountants (Australia and New Zealand) and the Governance Institute of Australia all emphasised that there are relatively few business related bankruptcies compared with non-business related bankruptcies.55 This finding was confirmed in a recent study of a sample of AFSA data, which found that only 21 per cent of bankruptcies over the period 1 July 2007 and 20 June 2016 were business-related.56 A number of submissions recommended that the reduction in the default period of bankruptcy be targeted to business rather than consumer bankruptcies.57 The Law Council of Australia considered there were

49. Ibid., p. 5. 50. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 15, 2017, The Senate, 6 December 2017, p. 7. 51. Senate Standing Committee on Legal and Constitutional Affairs, Submissions to the Senate Standing Committee on Legal and Constitutional Affairs, Inquiry into the Bankruptcy Amendment (Enterprise Incentives) Bill 2017, The Senate, Canberra. See

also: The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, Consultation, The Treasury website. 52. Australian Bankers’ Association, Submission to the Senate Standing Committee on Legal and Constitutional Affairs, Inquiry into the Bankruptcy Amendment (Enterprise Incentives) Bill 2017, 6 February 2018, p. 1. See also: Australian Bankers’ Association,

Submission to The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, 7 June 2016, p. 3. 53. Australian Bankers’ Association, Submission to the Senate Standing Committee on Legal and Constitutional Affairs, Inquiry into the Bankruptcy Amendment (Enterprise Incentives) Bill 2017, op. cit., pp. 2-3. 54. Australian Shareholders’ Association, Submission to The Treasury, National Innovation and Science Agenda - Improving

bankruptcy and insolvency laws, 27 May 2016, p. 3. 55. Ibid; Chartered Accountants (Australia and New Zealand), Submission to The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, 27 May 2016; Governance Institute of Australia, Submission to The

Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, 27 May 2016 . 56. Ali et al., ‘The incidence and causes of personal bankruptcy in Australia’, op. cit., pp. 27-35. 57. See, for example, the Governance Institute of Australia, Submission to The Treasury, op. cit., Law Council of Australia,

Submission to The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, 26 May 2016 and The Law Society of New South Wales, Submission to The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, 28 June 2016.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 9

‘different policy considerations between business and consumer bankruptcy that may justify a more nuanced approach to reducing the term of bankruptcy to a default of one year’.58 As a result, the Law Council ‘does not support the proposed general reduction in the default bankruptcy period’, instead stating:

As the objective of the change in duration of bankruptcy is to encourage innovation and entrepreneurship the Law Council recommends that discharge from bankruptcy after one year should only be available as a possibility in bankruptcies that directly or substantially result from the failure of a business that commenced within the previous five years of the date of bankruptcy.

59

CPA Australia raised concerns that, in the absence of ‘complementary policy initiatives’, the assertion of promoting an entrepreneurial culture is ‘illusory’.60 A submission from Griffith University also questioned the effectiveness of reducing the discharge period as a mechanism to increase innovation and entrepreneurial activity.61 A joint submission from the Personal Insolvency Professionals Association and Bond University to the Treasury consultation argued that the proposed reduction in bankruptcy stigma as a justifying factor for the proposed changes is flawed, suggesting instead that the stigma derives from the credit file implications of bankruptcy rather than the default period.62

In contrast, the Financial Rights Legal Centre, Financial Counselling Australia (FCA) and the Consumer Action Law Centre, in a joint submission, supported the proposed reduction of the period of bankruptcy, considering that the Bill:

… strikes an appropriate balance between the interests of creditors, and ensuring that bankruptcy enables a fresh start for debtors, and is not needlessly punitive. Reducing the bankruptcy period as described in the bill is likely to have a fairly minimal effect on the amounts recouped by creditors from bankrupt estates, but significantly improves the bankrupt’s opportunities for early financial rehabilitation and participation in economic activity.

63

In a submission to the Treasury consultation, the Australian Chamber of Commerce and Industry supported the proposal to reduce the default period for a bankruptcy ‘in cases where an individual has not previously been bankrupt’.64 However, it cautioned that a reduced bankruptcy term in circumstances where there had been a previous bankruptcy or ‘where misconduct has occurred has a strong likelihood of raising creditor risk’.65 The Australian Institute of Credit Management

58. Law Council of Australia, Submission to The Treasury, op. cit., p. 5. 59. Law Council of Australia, Submission to the Senate Standing Committee on Legal and Constitutional Affairs, Inquiry into the Bankruptcy Amendment (Enterprise Incentives) Bill 2017, 31 January 2018, p. 2. 60. CPA Australia, Submission to The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency

laws, 3 June 2016, p. 1. See also: CPA Australia, Submission to the Senate Standing Committee on Legal and Constitutional Affairs, Inquiry into the Bankruptcy Amendment (Enterprise Incentives) Bill 2017, 31 January 2018. 61. Griffith University, Submission to The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, 1 June 2016, p. 1. 62. Personal Insolvency Professionals Association and Bond University, Submission to The Treasury, National Innovation and

Science Agenda - Improving bankruptcy and insolvency laws, 1 June 2016, p. 3. 63 Financial Rights Legal Centre, Financial Counselling Australia & Consumer Action Law Centre, Submission to the Senate Standing Committee on Legal and Constitutional Affairs, Inquiry into the Bankruptcy Amendment (Enterprise Incentives) Bill

2017, January 2018, p. 3. See also: Financial Counselling Australia (FCA), Submission to The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, June 2016, p. 3; Financial Rights Legal Centre, Submission to The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, May 2016; Consumer Action Law Centre, Submission to The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, 27 May 2016. 64. Australian Chamber of Commerce and Industry, Submission to The Treasury, National Innovation and Science Agenda -

Improving bankruptcy and insolvency laws, 17 June 2016, p. 3. 65. Ibid.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 10

supported reducing the period of bankruptcy but argued for the need for ‘clarity on, and urgency placed upon, the trustee to be proactive in their investigations’.66

The Australian Criminal Intelligence Commission (ACIC) advised that its intelligence:

… suggests that reducing the default bankruptcy period from three years to one year may increase the potential for serious and organised crime groups to exploit bankruptcy provisions for their own advantage. 67

ACIC explained:

Through the use of illegal phoenix activity as a business strategy by serious and organised crime groups, ACIC intelligence indicates that there are individuals who exploit bankruptcy provisions to facilitate illegal activities. These individuals and groups are often aided by professional facilitators, who are intrinsic enablers of serious and organised financial crime. A current concern to the ACIC are liquidators and unregistered pre-insolvency advisors who are developing a niche in the criminal environment by facilitating and promoting the exploitation of bankruptcy provisions and illegal phoenix type activities. For example, by encouraging directors and accountants to transfer assets to new entities for Jess than market value, or to destroy or alter company records.

68

Financial implications The Explanatory Memorandum notes that the Bill is ‘deregulatory in nature’ and identifies savings of approximately $4 million per annum from commencement.69 The Office of Best Practice Regulation (OBPR) has agreed to the regulatory cost savings.70

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.71

Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights considered the Bill did not raise human rights concerns.72

Key issues and provisions Part 1 of Schedule 1 to the Bill reduces the default period of bankruptcy to one year. As part of the reduction in the default period, other time periods associated with bankruptcy are also reduced to one year. These include disclosure of bankrupt status when applying for credit, seeking permission for overseas travel and the attainment of certain licences and entering into certain professions.

The amendments provide that income contribution obligations for discharged bankrupts extend for a minimum two year period following discharge (or, if bankruptcy is extended due to non-

66. Australian Institute of Credit Management, Submission to The Treasury, National Innovation and Science Agenda - Improving bankruptcy and insolvency laws, 27 May 2016, p. 3. 67. Australian Criminal Intelligence Commission, Submission to the Senate Standing Committee on Legal and Constitutional Affairs, Inquiry into the Bankruptcy Amendment (Enterprise Incentives) Bill 2017, 5 February 2018, p. 1. 68. Ibid. 69. Explanatory Memorandum, Bankruptcy Amendment (Enterprise Incentives) Bill 2017, p. 3. 70. Department of the Prime Minister and Cabinet (PMC), ‘Bankruptcy reforms’, PMC website, 18 December 2017. 71. The Statement of Compatibility with Human Rights can be found at page 5 of the Explanatory Memorandum to the Bill. 72. Parliamentary Joint Committee on Human Rights, Report, 12, 2017, 28 November 2017, p. 96.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 11

compliance, for a period of five to eight years); and ensure that persons who are under an obligation to notify changes in contact details continue to do so.

Part 2 of Schedule 1 to the Bill contains application and transitional provisions which clarify how the amendments, once introduced, apply to persons who are currently undischarged bankrupts.

Part 1 - Amendments Section 59 of the Act deals with the effect of second or subsequent bankruptcies when a bankrupt is not yet discharged from an earlier bankruptcy. Section 59 currently provides that property of the bankrupt that was acquired or transferred to the bankrupt on or after the date of the earlier bankruptcy, vests in the trustee in the later bankruptcy. The trustee of the earlier bankruptcy is deemed to be a creditor in the later bankruptcy.

Item 1 of Schedule 1 to the Bill inserts proposed paragraph (f) into subsection 59(1). This provides that where a person who is a bankrupt becomes a bankrupt again, the income contribution obligations arising out of the first bankruptcy will cease and the contribution assessment period for the first bankruptcy will come to an end.

Under sections 139P and 139Q of the Act, bankrupts are obligated to make income contributions until discharge where their income exceeds a prescribed threshold. Item 2 inserts proposed subsection 59(7) which ensures that ceasing income contributions to a trustee in an earlier bankruptcy does not limit any ability to establish a new contribution assessment period in relation to a later bankruptcy.

Item 3 repeals the heading to section 80 (currently ‘Notification of change in name, address or day-time telephone number’) and substitutes ‘Notification of change in contact details’. Item 4 repeals subsection 80(1), which requires bankrupts to ‘immediately’ tell the trustee of any change to their name or principal place of residence, and replaces it with the requirement to notify the trustee within ten business days of any change to their name, address and phone number during the ‘prescribed period’. Item 5 inserts proposed subsection 80(3) to include definitions of ‘bankrupt’ and ‘prescribed period’ for section 80. The definition of ‘prescribed period’ means whichever is the longer of:

• the period of the bankruptcy

• the period three years from the date the bankrupt filed their statement of affairs and

• the period for which the bankrupt is or remains liable to make income contributions payments.

This means bankrupts will have an obligation to notify trustees of changes to their contact details for a period after the default one year bankruptcy period. Subsection 80(1) is currently a strict liability offence with a penalty of six months imprisonment and this remains the case under the Bill as introduced. However, in response to concerns raised by the Scrutiny of Bills Committee, the former Attorney-General undertook to introduce amendments to ensure that section 80 complies with the Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, by not providing a sentence of imprisonment for a strict liability offence.73

Item 6 amends the objects of Part VI Division 4B of the Act (which relates to contributions by bankrupts and recovery of property) to extend the requirement for bankrupts to make income contributions ‘during the bankruptcy’ to ‘during a period after becoming bankrupt’. The Explanatory Memorandum notes that income contributions from bankrupts were introduced in

73. See discussion of subsection 80(1) under Senate Standing Committee for the Scrutiny of Bills (pp. 6-7 of this Digest).

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 12

1992 to address situations where ‘bankrupts earned large incomes after bankruptcy but were not required to make any repayment to creditors from that income’.74 It states that changes in the Bill ‘will ensure that high income earners do not abuse bankruptcy laws by reducing their income for a year, hiding their assets, accruing excessive debt and only being subject to contributions for a one year period’.75

Item 7 inserts a new definition of bankrupt for Part VI, Division 4B, to include ‘a person who has been discharged from bankruptcy’. This captures persons who are eligible to make income contribution payments but who have been automatically discharged after one year.

Item 8 replaces the definition of contribution assessment period in section 139K of the Act, to ensure that a bankrupt (or discharged bankrupt) will be liable for income contributions for at least three contribution assessment periods (one during the period of bankruptcy and at least two after discharge). The contribution assessment period begins on the day on which the bankrupt becomes bankrupt, or on an anniversary of that day, and ends one year after that day or anniversary.

The amendment made by item 7 means that existing subsection 139L(2) which expands the definition of a bankrupt is redundant. Accordingly, item 9 makes a consequential amendment and item 10 repeals existing subsection 139L(2) (including the note).

Section 139P of the Act sets out the liability of bankrupts to make income contribution payments during contribution assessment periods. Section 139Q provides for adjustment of the liability in those cases where actual income differs from the amount predicted by the trustee under the initial assessment. Existing section 139R provides that any liability of a bankrupt to pay contributions pursuant to section 139P or 139Q is not affected by discharge. Item 11 substitutes a new section 139R to ensure that the liability to pay income contributions is not affected by discharge or the expiration of any contribution assessment period.

Section 139WA provides for circumstances when an assessment of a bankrupt’s income and contribution under section 139W can be made. Items 12 and 13 repeal subsection 139WA(2) as a result of the definition of bankrupt inserted by item 7. The insertion made by item 7 also means the definition of bankrupt in section 139ZIB is redundant (as section 139ZIB sits within Part VI Division 4B). Similarly, item 14 repeals the definition of bankrupt in section 139ZIB.

A trustee may determine (by notice) that, where a bankrupt is not meeting contribution assessment payments, he/she is required to open a bank account into which all of his/her income is deposited and withdrawals can only be made from the account with the trustee’s permission. This is a supervised account regime (subsection 139ZIC(1) of the Act). Item 15 repeals subsections 139ZIDA(2) and 139ZIDA(3) which relate to ceasing of the determination upon discharge. It inserts proposed subsections 139ZIDA(2) and 139ZIDA(3) to ensure that determinations regarding supervised account regimes apply post discharge and throughout the contribution assessment periods.

Item 16 repeals and substitutes section 139ZIIA to provide that where a bankrupt is subject to the supervised account regime, the obligations imposed by section 277A (relating to keeping and producing books) continue until that regime ceases to apply.

Item 17 repeals the definition of bankrupt in section 139ZJ as this section sits within Part VI Division 4B and contains the same definition as the new definition in section 139K (see item 7).

74. Explanatory Memorandum, Bankruptcy Amendment (Enterprise Incentives) Bill 2017, p. 9. 75. Ibid.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 13

Existing section 149 relates to automatic discharge from bankruptcy. Item 18 amends subsection 149(4) to apply an automatic discharge after three years from the date of bankruptcy, if the bankruptcy occurs before commencement of proposed subsection 149(5) (see also item 30 below.) Item 19 inserts proposed subsection 149(5) to provide that, if bankruptcy occurs after commencement, bankrupts will be discharged from bankruptcy one year after the date the statement of affairs was filed.

Existing section 149A extends the period of bankruptcy when an objection to discharge takes effect. Items 20-22 amend section 149A to insert references to proposed subsection 149(5) and ensure that this applies to the one year automatic discharge. The Explanatory Memorandum states these amendments ‘will provide safeguards to extend a bankruptcy, if appropriate, despite the reduced default period of bankruptcy’.76

Existing section 265 imposes obligations and duties on a bankrupt in respect of disclosing property and other information. Item 23 inserts proposed subsections 265(10) and 265(11) which extend the duties and penalties contained in this section to a person who has been discharged from bankruptcy for the prescribed period. The applicable definition of prescribed period includes circumstances when a bankrupt is required to make income contributions payments.

Items 24-29 extend the obligations under section 277A to oblige bankrupts discharged automatically after one year to keep and produce books during the prescribed period (the definition of which includes circumstances when a bankrupt is required to make income contributions payments).

Part 2 - Application and transitional provisions Item 30 concerns the application of the default one year period to existing bankruptcies on the commencement day. Subitem 30(1) outlines definitions of commencement day and prescribed period for item 30.

Subitem 30(2) provides two options for persons who are bankrupt immediately before the commencement day (and not subject to an objection to discharge) to be discharged.

If the period from the date on which the bankrupt filed their statement of affairs to the commencement date is less than one year, then the bankrupt is discharged at the end of one year from the date the bankrupt filed. If one year or more has elapsed the bankrupt is discharged on the commencement date.

The Explanatory Memorandum states:

This approach will avoid the unfairness of a bankruptcy on foot under the old laws being discharged years after a bankruptcy that starts under the new provisions contained in the Bill. It will also remove any incentives for individuals to delay petitioning for bankruptcy as all bankruptcies filed after the commencement date will only run for one year.

77

Subitem 30(3) provides that this does not apply to those bankrupts, who, immediately before the commencement day, are subject to a section 149B objection to discharge that has extended the period of bankruptcy to five or eight years. The ability of the trustee to lodge an objection under section 149B after the commencement of Schedule 1 is also not affected.

76. Ibid., p. 14. 77. Ibid., pp. 14-15.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 14

Subitem 30(4) clarifies that if an objection by a trustee is withdrawn or cancelled under section 149N (concerned with a decision on review), the bankrupt will only be discharged if at least one year has expired since the filing of the statement of affairs with the Official Receiver and the cancellation has taken effect subject to section 149N(2). The Explanatory Memorandum states:

Section 149N(2) stipulates that cancellation of an objection cannot take effect until the end of the period within which an application may be made to the Administrative Appeals Tribunal (AAT) for the review of the decision, or if an application is made - the decision of the AAT is given. Accordingly, despite a bankruptcy being over one year old and the Inspector-General making a decision to cancel the objection under section 149N(1), a bankrupt in these circumstances will not be discharged until the end of the period stipulated in section 149N(2).

78

Subitem 31(1) allows the Minister, by legislative instrument, to make rules prescribing matters of a transitional nature relating to amendments or repeals made by the Act. The Explanatory Memorandum states that the introduction of an automatic discharge after one year will require transitional arrangements and that additional transitional rules will assist in giving effect to the Bill ‘including dealing with transitional matters that were not foreseen when the Bill was drafted’.79

Subitem 31(2) restricts the subject matter that the rules can prescribe. The rules may not: create an offence or civil penalty; provide powers of arrest, detention, entry, search or seizure; impose a tax; set an amount to be appropriated from the Consolidated Revenue Fund; or directly amend the text of the Bill.

Concluding comments The purpose of the Bill is to amend the Act to reduce the default period of bankruptcy from three years to one year.

Submissions to the Senate Legal and Constitutional Affairs Legislation Committee inquiry into the Bill and the Treasury consultation process highlighted a number of areas of concern with the Government’s proposals, including:

• questioning the effectiveness of reducing the bankruptcy period as a means of increasing innovation and promoting entrepreneurial behaviour

• noting that a reduction in the bankruptcy period to one year may be insufficient time to investigate the circumstances of a debtor, could lead to an increase in the number of personal bankruptcies and may be inappropriate in cases of repeat bankruptcy

• noting that reducing the default bankruptcy period from three years to one year may increase the potential for serious and organised crime groups to exploit bankruptcy provisions for their own advantage and

• suggesting that the amendments could be better targeted to business rather than consumer bankruptcies.80

The Senate Legal and Constitutional Affairs Legislation Committee recommended that the Corporations Act be amended to ensure that the one year default period does not allow bankrupts discharged after that period to immediately become the sole director of a proprietary company. Subject to that recommendation, the Committee recommended that the Bill be passed.

78. Ibid., p. 15. 79. Ibid.

80. See discussion under ‘Position of major interest groups’ at pages 7-9 of this Digest.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 15

The Explanatory Memorandum claims that the Bill will result in savings of $4 million per annum from commencement, but does not identify the source of these savings.81

81. Explanatory Memorandum, Bankruptcy Amendment (Enterprise Incentives) Bill 2017, p. 3.

Warning: All viewers of this digest are advised to visit the disclaimer appearing at the end of this document. The disclaimer sets out the status and purpose of the digest. Bankruptcy Amendment (Enterprise Incentives) Bill 2017 16

© Commonwealth of Australia

Creative Commons

With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.

Disclaimer: Bills Digests are prepared to support the work of the Australian Parliament. They are produced under time and resource constraints and aim to be available in time for debate in the Chambers. The views expressed in Bills Digests do not reflect an official position of the Australian Parliamentary Library, nor do they constitute professional legal opinion. Bills Digests reflect the relevant legislation as introduced and do not canvass subsequent amendments or developments. Other sources should be consulted to determine the official status of the Bill.

Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library’s Central Enquiry Point for referral.

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.