Personal Insolvency Reforms – Proposed Change to Bankruptcy Period

insolvency bankruptcy accountants

By Ashley Leslie

In late 2015, the Federal Government as part of its National Innovation & Science Agenda proposed reforms to personal insolvency laws designed to create a better balance between encouragement of entrepreneurship and protection of creditors.

One of the proposed changes is the reduction of the default bankruptcy period from three (3) years down to one (1) year where no offence has been committed.

It is thought that the current three (3) year period of bankruptcy may discourage innovation and reduce the number of new business start-ups.  In addition, there are restrictions placed on bankrupts for the duration of their bankruptcy in relation to overseas travel, the incurring of further debts, the continuation of some employment (e.g. acting as director of a company is prohibited) and the holding of some licences (e.g. bankrupts cannot hold real estate licences).  For some who are more risk adverse, three (3) years of bankruptcy coupled with these restrictions would be sufficient deterrent from starting their own business for fear of failure.

The proposal to reduce the bankruptcy period to one (1) year is intended to alleviate some of the above restrictions as well as the stigma that is often associated with bankruptcy.  The proposed changes acknowledge that bankruptcy can be a result of necessary risk-taking or misfortune associated with running a business rather than intentional wrongdoing.  Its main purpose is to give former bankrupts an opportunity to start over, learn from mistakes and continue with new innovative ventures.

Despite the reduction in time, it is proposed that trustees retain the power to object to a bankrupt’s discharge and to extend the period of bankruptcy up to eight (8) years where misconduct has occurred.  In addition, a bankrupt will be obligated to assist in the administration of their bankruptcy even after they have been discharged.

However, it is also proposed that the income contribution regime be separated from the default bankruptcy period.  The effect of this is that a bankrupt’s obligation to pay income contributions will remain at three (3) years regardless of the default bankruptcy period being reduced to one (1) year.  Where the bankruptcy is extended to five (5) or eight (8) years, income contributions will also be payable for that extended period up until discharge.

The proposed changes will likely have little impact on creditors, whose right to claim in an estate will be unaffected.  Likewise, a trustee’s statutory powers to recover vested assets and voidable transactions will still be available.  The only other likely impact of the proposed measures is that a trustee’s ability to recover ‘after-acquired’ property (i.e. property acquired by a bankrupt before they are discharged) will only be available for the suggested one (1) year bankruptcy term.

Time will only tell whether these proposed amendments to bankruptcy law will have the desired effect of encouraging increased innovation and measured risk-taking amongst the business community.

The Government sought submissions on these proposals from all interested stakeholders earlier this year with a view to the proposed amendments becoming law in mid-2017.

Want to know more?

If you would like to know more about the issues raised in this article, please contact Ashley Leslie our Insolvency & Reconstruction Senior Manager for assistance.

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