Proposal to Reduce Bankruptcy Term from 3 years to 1 year

  • COVID-19
  • Published 04.03.2021

Key Takeaways

In January 2021 the Attorney-General’s Department (‘Department’) released a discussion paper in relation to potential changes to the bankruptcy system due to the impact of COVID-19.

The Department sought submissions on various amendments to the bankruptcy system in Australia, including a proposal to amend the default period of bankruptcy under the Bankruptcy Act 1966 (Cth) (‘the Act’).

Submissions closed on 12 February 2021 with no indication on when a Bill may be drafted. The Department notes that submissions may be published on their website in the future. In any event, some private entities have released their submissions to the public.

Many submissions that we have read oppose the changes, however the fact that the proposal has been re-introduced suggest it has substantial support in Parliament and may become law.

Proposed Legislation

Currently, pursuant to s149 of the Act, the default period for automatic discharge of a bankrupt is three years from the date on which the bankrupt filed his or her statement of affairs. As per the discussion paper, the Attorney-General is considering an amendment of the default position to one year. 

This is a proposal that was originally floated pursuant to the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (‘Bill’). This Bill eventually lapsed just prior to the 2019 Federal Election. The Department has reintroduced the proposal because of the anticipated impact of COVID-19 on the number of individuals who are likely to enter bankruptcy.

When the proposal was originally open to public consultation between 29 April 2016 and 27 May 2016, there were many skeptics of the proposed amendment to reduce the bankruptcy term, citing, among other reasons, that the bankruptcy process would be abused.

The Department has indicated that the aim of this amendment is to reduce the stigma around bankruptcy and ameliorate the punitive nature of the current regime. Additionally, given the current economic environment, the amendment seeks to promote entrepreneurs to undertake business activity with the reduced term and penalties, essentially encouraging individuals to try again if previous business attempts have failed.

As a result of the concerns raised during the previous consultation period, the Department has considered further refinements to the original proposal in the 2017 Bill, including:

  • strengthening the objection to discharge regime;
  • implementing an early discharge application process;
  • introducing criteria that would exclude a bankrupt from the default discharge period of one year; and
  • strengthening the offence provisions.

Commentary

In 2017, the Constitutional Affairs Legislation Committee (‘Committee’) recommended that the Senate pass the Bill subject to an amendment that discharged bankrupts may not immediately become the sole director of a proprietary company. It is likely that the Committee will once again support the proposal.

As in 2017, there have been many skeptics of the reintroduction of this proposal. ARITA, who have released their submissions to the discussion paper, is one of them and has stressed that law reforms should be based on long term learnings rather than a knee-jerk response to the economic environment as a result of  COVID-19.

Commentary by Kate Carnell, Australian Small Business and Family Enterprise Ombudsman, notes that over 70 per cent of small businesses are unincorporated and made up of sole traders and partnerships and that many of the owners will likely become bankrupt. She stresses that obtaining finance post-bankruptcy in Australia is ‘almost impossible’, a concept echoed by ARITA. As such, it is argued that entrepreneurial endeavors will not be promoted by the proposed amendment, as the obstacles to obtaining finance for individuals post-bankruptcy will not change. 

ARITA have submitted that the reduced discharge term should only be available to those who meet certain eligibility requirements, similar to the recent simplified corporate insolvency eligibility requirements. Additionally, ARITA have submitted that a bankrupt should only have access to the reduced discharge terms in circumstances where the trustee consents, the bankrupt is genuinely and honestly assisting the trustee, and the creditors agree.

The Australian Institute of Credit Management, in their submissions, are also against the proposal in its current form, and following consultation with their members, have raised that a reduced discharge term should only be available where:

  • the debtor has not previously been declared bankrupt;
  • the debtor did not significantly contribute to the bankruptcy;
  • the debtor has cooperated with the Trustee; and
  • creditors have had the opportunity to object to the discharge.

Implications

Potential implications of a reduced default bankruptcy term to one year being passed into law include:

  1. automatic discharge will occur after one year;
  2. the new time frame may be too short for the trustee to be able to substantiate reasonable grounds to deny discharge of the bankrupt at one year;
  3. the threat of bankruptcy may be less of a deterrence for debtors; and
  4. there is a good chance there will also be other changes made, and passed into law, to address some of the fears about the reduced one year term being exploited.

The proposal is still in its early stages, with the period for submissions having closed on 12 February 2021. We will continue to monitor for further updates.

Allan Kawalsky

Partner

P: 03 8600 5022

Email Allan