Government introduces Bankruptcy Amendment legislation

Since 2014, the Federal Government has been examining whether bankruptcy law should be reformed, with a specific focus on reducing the period of time a bankrupt faces restrictions by reducing the automatic discharge period from three years to one.

With little fanfare, legislation reflecting this and other changes to the Bankruptcy Act 1966 (Cth) (Act) was introduced to the Commonwealth Parliament last Thursday, in the form of the Bankruptcy Amendment (Enterprise Incentives) Bill 2017, which is set to commence (if passed) six months from Royal Assent.

Importantly, while the bill does specifically deal with the reduction of the default period of bankruptcy from three years to one, it also contains other significant reform measures to the Act, which will affect creditors, individuals who are or may become bankrupt and practitioners.  These include amendments:

• Clarifying that income contribution obligations for discharged bankrupts extend for a minimum period of two years following discharge or, in the event that a bankruptcy is extended due to non-compliance, for a period of five to eight years.
• Providing that the income contribution obligations arising out of a first bankruptcy will cease and the contribution assessment period for the first bankruptcy will come to an end, where a person becomes bankrupt again in the period in which those obligations are still on foot.
• To ensure the trustee in the later bankruptcy can exercise the powers that would have been available to the trustee in the earlier bankruptcy with respect to contribution assessment periods.

The bill also includes transitional provisions providing that all bankruptcies on foot at the commencement date, except those subject to a section 149B objection (which have been extended to five or eight years) will be discharged if one year has expired since the bankrupt filed a statement of affairs with the Official Receiver.

Lavan comment

The reduction in the automatic discharge period has been a long time coming, having been modelled on the reform undertaken in the United Kingdom over a decade ago.  It remains to be seen whether, in light of the significantly higher levels of personal consumer rather than business debt in Australia, compared to the UK, this will in fact ‘encourage entrepreneurs to re-engage in business sooner, and encourage people...to pursue their own business ventures’ as the explanatory memorandum to the bill predicts.

Other, perhaps less expected measures, by way of the amendments clarifying the enforceability of existing income contribution obligations by a subsequently appointed trustee, reduce the scope for uncertainty about to whom a bankrupt owes his or her obligations and are welcome.

The six month delay in any legislation coming into force  should also enable parties time to adjust to the new arrangements, including relevantly, consideration (particularly by trustees) of whether objections can or should be made to the discharge of existing bankruptcies.

Finally, this period is also intended to allow professional bodies time to consider whether a one-year restriction on the licensing or other aspects of a professional’s work regulation is sufficient.

It will be interesting to observe whether professional bodies (including legal practice and accounting boards) take the Federal Government’s view that current bankruptcy laws are ‘punitive’ and therefore whether professionals deserve a lesser period of sanction for becoming insolvent.

Lavan will monitor and keep readers of this update posted on further developments.