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One Year Bankruptcies – What is the current state of play?

One Year Bankruptcies – What is the current state of play?

It has been some time now since the Federal Government introduced the Bankruptcy Amendment (Enterprise Incentives) Bill which proposes to reduce the period of bankruptcy from 3 years to 1 year. However, a Trustee in 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.

As Insolvency Practitioners, we are regularly questioned about where these proposed amendments to the Bankruptcy Act are at. To be totally frank, I don’t think our legislatures even know the answer to this!

 

Concerns with the Government’s proposal.

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:

  • 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.

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.

Article written by Michael Carrafa, Executive Director SV Partners Victoria

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