One Year Bankruptcy Term | What You Should Know

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By Liyan Tay and Glen Reeve

Last month the Federal Parliament was reintroduced to the Bankruptcy Amendment (Enterprise Incentives) Bill which proposes to reduce the default period of bankruptcy from 3 years to 1 year, whilst preserving the Trustee’s ability to extend the bankruptcy period in case of misconduct.

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.

Undischarged bankrupts currently face a number of restrictions, including:

  • Requiring permission from the bankruptcy Trustee to travel overseas.
  • Disclosure of their bankruptcy status when trying to obtain credit, goods & services over a prescribed threshold.
  • Unable to hold directorship positions or practice certain professions.
  • Property acquired by an undischarged bankrupt automatically vests in their Trustee.
  • Some limitations with regards to business and professional memberships.

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.

Want to know more?

If you would like to know more about the Bankruptcy Amendment Bill, please contact Insolvency & Reconstruction Senior Manager Liyan Tay for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

 

 

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