31 Jan 2016

Government to introduce 1-year bankruptcies


3 min

Will there be any real impact for creditors?

Late last year the Federal Government announced as part of its National Innovation Statement that the bankruptcy period in Australia will be reduced from three years to one year. It is stated this change strikes a better balance between encouraging entrepreneurship and protecting creditors.

So where did the idea of a proposed reduction in the bankruptcy period to one year come from and will there be any real impact on a bankruptcy's administration?

The Productivity Commission proposed this idea in its report on Business Set-up, Transfer and Closure, which was sent to the Government in September 2015 and released to the public in December 2015. In its report the Productivity Commission made the following recommendations regarding personal insolvency.

Recommendation 1 – Automatic Discharge after 1 year
That the Bankruptcy Act 1966 should be amended so that, where no offence has occurred, a bankrupt is automatically discharged after one year. Specifically, this should apply to restrictions relating to overseas travel, holding an office under the Corporations Act 2001 employment within certain professions and access to personal finance.

The trustee, and the courts, should retain the power to extend the time until the bankrupt is discharged for a period of up to eight years if there are concerns regarding the bankrupt’s conduct. Any extensions should be recorded on the National Personal Insolvency Index.

Recommendation 2 – Continuation of income contribution regime
The obligation of bankrupts to make excess income contributions to their trustee should remain for three years. The period of excess income contributions can be extended at the discretion of the trustee to up to eight years. If the period of bankruptcy is extended beyond three years, then excess income contributions should be required until discharge.

Clearly some debate exists as to whether the reduced bankruptcy period will strike the right social balance between rehabilitating debtors (bankrupts) with the need to discourage reckless borrowing and spending, and there are sure to be creditors who would want the current three-year bankruptcy period to remain.

However, there would seem to be minimal impact upon the administration of a bankruptcy file (and creditors) if these recommendations become law.

Assets—all divisible assets as at the date of bankruptcy will still be available for realisation by the trustee, with the only impact being on ‘after-acquired’ property (being property that devolves on a bankrupt while they are undischarged e.g. lottery winnings, inheritances).

Income Contributions—despite the reduced bankruptcy period, income contributions will still be required to be paid (if applicable) for three years (or longer) as is currently the case.

Trustee powers—a trustee's statutory powers to recover assets and voidable transactions will continue to be available.

Creditors—the position of a creditor to claim in an estate will remain unchanged. They will be entitled to submit a Proof of Debt in the estate and subject to acceptance of their claim, participate in any dividends that may be paid from the estate by the trustee.

We will have to wait to see whether the proposed reduced bankruptcy term will encourage more Australians to take more risks, be more innovative and therefore ambitious, as is the stated aim of Government; however from a creditor perspective it appears that creditors will not be unfairly disadvantaged by the proposals.

The Government has indicated that a proposal paper including the above recommendations will be released in the first half of this year, with a view to the introduction and passage of legislation in mid-2017.

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