The world is developing faster each year with changes to technology and the advance of AI leading to much of the evolution. It is interesting to reflect on the changes that have taken place within the bankruptcy arena in Australia over the last few decades. Some of the changes have been driven by policy initiatives that treat bankruptcy as an opportunity for a fresh start as opposed to the punishment regime that was previously a significant purpose.
Prior to January 1844 a debtor could be imprisoned for failure to pay their debts. In January 1844 legislation was introduced that abolished imprisonment for debtors. Part of the reason behind the abolition was that the economy was experiencing tough financial conditions and increasing numbers were putting a strain on prison resources. At that time bankruptcy legislation was specific to each state and it was not until 1924 that a federal system was introduced.
The first major changes to the bankruptcy regime came into effect with the introduction of the Bankruptcy Act 1966 (Act). Prior to the introduction of the Act, a bankrupt had to apply to Court for release from bankruptcy. Similarly, a trustee was required to file an account of each administration with the Court and apply to be released as trustee. In practice a person could be bankrupt indefinitely even following the filing of a Statement of Affairs.
The 1966 Act reduced the minimum period for which a person could be bankrupt to five years. Contrast that with subsequent amendments that reduced the minimum period to three years and the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 which proposes a reduction of the period of bankruptcy to one year (in certain cases). This Bill has not yet been passed. Its intent was to encourage entrepreneurial behaviour and reduce the stigma of bankruptcy. In broad terms it counterbalanced the early discharge provisions for debtors with low levels of debt and assets that were introduced in 1991 and repealed in 2003. There was a carve out in all stages of the amendments to the Acts and in the Bill for recalcitrant debtors providing for an extension of the duration of bankruptcy to a current maximum of eight years. A bankrupt who fails to lodge a Statement of Affairs still remains bankrupt indefinitely.
Since 1966 some of the changes to the Act have arisen in response to public concern about the activities of high profile debtors. Alan Bond’s lifestyle afforded him benefits that were not assessable as income because they were not derived from employment. Subsequent amendments incorporated provisions to assess as income benefits received by a bankrupt from the largesse of family and friends. The ability of a bankrupt to travel overseas was also addressed following the departure of Christopher Skase to Majorca shortly after he was made bankrupt. For a number of years prior to his death, he successfully resisted attempts to extradite him to Australia.
High profile debtors cannot escape public scrutiny. In recent years other bankrupts have been able, to some extent, to keep their status private, at least in social circles. The requirement to gazette bankruptcies arising by way of sequestration order was dispensed with some time ago. While all bankruptcies whether debtor or creditor initiated are recorded on the National Personal Insolvency Index, maintained by the Australian Financial Security Authority, it requires an interested party to pay a fee to undertake a search. Further, the search requires an exact name match and hence aliases may not be detected. Information available on a Federal Court Lawsearch provides information in relation to sequestrated estates only.
Some professions prohibit employment of a bankrupt. This predominantly relates to employment involving the handling of monies or where a person is required to be a “fit and proper” person. In those circumstances a trustee would be expected to notify the employer or industry body. Otherwise, a trustee would not normally contact an employer except in the event of non-cooperation by the bankrupt. Notwithstanding a reduction in advertising bankruptcies, bankrupts will still be required to disclose current and past bankruptcies in rental applications and financial documents.
While the number of bankruptcies fell significantly in 2019 and 2020 as a consequence of COVID-19 the long-term impact of the lock down is starting to impact bankruptcy appointments, a flow on effect from the liquidation of companies finally succumbing to the debts accumulated in that period.
Moving forward, amendments to the bankruptcy legislation are inevitable as we grapple with the economy, anti money laundering checks, changes to the taxation system and public pressure. While some changes may seem to be harsh, there has been a more compassionate approach in areas such as the mental health of vulnerable debtors, something that was clearly absent from the debtors’ prisons of the nineteenth century. If it is necessary to contemplate bankruptcy it is surely a better environment in 2026 than 1844.
Article by Hillary Orr (Consultant) – Adelaide