One Year Bankruptcy Discussions – Insolvency/Bankruptcy/Restructuring

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Australia: Year-long bankruptcy talks

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POTENTIAL PARTS REFORMS WILL CONTINUE.

One-year bankruptcy is back on the table. After expiring due to the 2019 federal election call, the Bankruptcy (Business Incentives) Amendment Bill of 2017 is being considered again through stakeholder submissions that the Attorney General’s Office is seeking. as an ongoing response to the impacts of COVID-19. Regardless of the industry, permanent changes to the law in response to a temporary economic event are risky. A reform adapted to the current economic environment will not necessarily mean that it will be a good policy in the future.

A shorter bankruptcy period is not something new. Until 2003, bankrupts could apply for early discharge after six months. To qualify, the bankrupt’s estate had no prospect of dividends, the bankrupt was not required to pay any income assessments, and the trustee in bankruptcy determined that no possible voidable transaction would result in a dividend for the creditors. The bankrupt would be disqualified from making a claim if he had taken advantage of the
Bankruptcy Act 1966 in the previous 10 years, had unsecured creditors exceeding 150% of annual income, failed to disclose certain information, or engaged in deceptive conduct.

The abolition of the early discharge feature was primarily due to fears that the majority of bankrupts were consumer debtors who stretched too much on credit by taking the “easy route” – knowing that they could emerge from bankruptcy sooner. early rather than seriously considering informal negotiations, part 9 or part 10 agreements. The perception was that the law favored the debtor over the creditor. Here we are almost 20 years later, contemplating reform to restore something similar, but for what appears to be for different reasons.

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It is important to understand that a bankruptcy can continue beyond the discharge of the person after the current term of three years. What we’re really talking about is how long a person is bound by the following restrictions (as an undischarged bankrupt):

  • Cannot be an entrepreneur (related to the business).
  • Restrictions or conditions on industry memberships or licenses (primarily business related).
  • Effects on obtaining credit (personal and professional).
  • Consent required from trustee in bankruptcy to travel abroad (related to compliance).

We can conclude that the restrictions imposed on an undischarged bankrupt mainly affect those involved in the management of businesses. For consumer bankruptcies, the above restrictions really don’t have a big impact on their daily lives. Similarly, for these bankruptcies, the length of time a person is bound by these restrictions generally does not affect the financial return to creditors, which is often zero.

In 2017, then Prime Minister, Malcolm Turnbull’s clear agenda for relaxing bankruptcy laws was to “promote and encourage entrepreneurial activity” by “reducing the stigma and harsh punishment” associated with the current bankruptcy regime of three years. Let’s face it, I think we’d be hard pressed to find an entrepreneur, aiming for success and nothing else, worrying about how long they’ll be out of business if their efforts fail. These minds are focused on designing the next breakthrough innovation.

So what we’re really talking about are two broad categories of people who typically go bankrupt:

  • Consumer bankruptcies; and
  • Administrators who go bankrupt due to severe business failure (perhaps combined with illegal phoenix activity to take advantage of the system).

For those in the latter category, a 12-month sentence does not seem at all punitive.

For consumer bankruptcies, the struggle is always to find that right balance of power between debtor and creditor. Interestingly, the number of bankruptcies per year has steadily declined from its peak of 27,250 in 2008-2009 to 15,330 in 2018-2019.1. A combination of the global financial crisis (attributing to the spike); a shift in consumer behavior from traditional credit card providers to buy-it-now, pay-later agreements; and an adoption of Part 9 debt agreements or informal arrangements could all be factors that play a role in fluctuating these numbers. I for one am very interested in seeing a detailed examination of the effectiveness of part 9 debt agreements (particularly after recent reforms tightening regulation in this space) in achieving its goal of balancing the affordability for the debtor and a fairer return to creditors.

One-year bankruptcies will most certainly lead to an increase in consumer bankruptcies, but more of a “perception” of lower impact rather than any real material difference to the debtor given the type of restrictions listed below. above. Looking at this from a policy perspective, it is likely that the perception of a government supporting struggling individuals and businesses in the current economic environment through piecemeal reform will once again be favored by scrutiny complete insolvency system. This, of course, would have much longer term benefits for debtors, creditors and ultimately the economy as a whole.

Worrells has more registered bankruptcy trustees than any other private company in Australia. Contact your local partner for advice or to find out more about the personal insolvency solutions available.

Epilogue: I wrote this article the week I became a registered trustee in bankruptcy. The experience of applying, studying and preparing for the interview has elevated my thinking and appreciation of what the personal insolvency regime should and could do. I join 17 bankruptcy trustees registered with Worrells and look forward to applying more value to debtors and creditors to achieve the best possible outcome.

Footnote

1 The Worrells Insolvency Report 2020, page 5. Click here to download a free copy.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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