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One Year Bankruptcy.

The Australian bankruptcy currently is 3 years and 1 day

One Year Bankruptcies Coming Soon:

Update 2019 April

The Bill was introduced into the Senate on 19 October 2017, a second reading was adjourned and then it was referred to the Senate Legal and Constitutional Affairs Committee in March 2018. The Senate Legal and Constitutional Affairs Committee was formed to inquire into the Bill and the Treasury consultation process highlighted a number of areas of concern with the Government’s proposals, including:
The Australian Federal Government is planning to introduce a Bankruptcy Amendment (Enterprise Incentives) Bill which reportedly reduces the period of bankruptcy from 3 years to 1 year.

The Trustee assigned to the  Bankruptcy will retain powers to extend the term in the event of misconduct.

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.

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’. Amendments to reduce the automatic discharge period to 12 months were proposed in 2009 but not introduced.

Concerns with the Government’s proposal.

 

  • 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.

 

Recommendations.

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.

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.

The current law is said to put too much focus on stigmatising and penalising failure.  Therefore, as part of the National Innovation & Science Agenda (“Innovation Agenda”) this reform aims to promote entrepreneurship and innovation and to reduce the stigma associated with bankruptcy.

Despite the intention for the Bill to have been passed and received Royal Assent sometime in late 2018 / early 2019, it is unlikely that this will occur anytime soon. Furthermore, given the likely Federal Election in the first half of 2019, we may possibly be set for further delays.

Undischarged bankrupts currently face a number of restrictions, including:

Important features

  • A Trustee is still able to lodge objection notices to discharge if a bankrupt does not comply with their duties. Such a notice can extend the bankruptcy discharge period from 5 or 8 years from the date the Statement of Affairs is filed.
  • A bankrupt will still be liable to be assessed for income contributions for 2 years after discharge.

Advantages

  • Bankrupts can be afforded a fresh start much sooner which will decrease the stigma of failure and encourage innovation and entrepreneurship.
  • Ability for Trustees to collect income contributions and extend the bankruptcy period if maintained.
  • Reduced administrative costs for bankruptcy Trustees and the Government in administering and overseeing bankruptcy matters.

Disadvantages

  • Uncertainty as to how much the reduction in the bankruptcy term will actually yield higher entrepreneurial activity. Statistics indicate that the highest cause in the majority of bankruptcy cases are due to excessive use of credit and unemployment (totalling 67%) rather than carrying on a business.
  • The changes will apply across the board to all bankrupts even those who ought to be discouraged from the conduct which led to their bankruptcy in the first instance.
  • Incentive for debtors to offer proposals to creditors to avoid or reduce bankruptcy in exchange for better returns to creditors is greatly diminished.
  • Reduced bankruptcy term may encourage individuals to take excessive risks or engage in unwanted business or financial conduct.

If the Bill is passed the new provisions will commence 6 months after Royal Assent is received.  Once the new laws commence all bankruptcies (including existing bankruptcies) will be discharged if they are over 1 year old unless they are subject to a Notice of Objection.  This will remove any incentives for debtors to delay petitioning for bankruptcy until after Royal Assent is granted.

The aim of the Bill is in line with the Innovation Agenda which encourages Australians to take reasonable educated risks, to leave behind the fear of failure and be more innovative and ambitious.

However, in reality it will be interesting to monitor the effectiveness of this new Bill as to whether it will balance out the impacts on both bankrupts and creditors alike as well as achieve the Government’s objective per the Innovation Agenda.

 

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