Happy 50th Birthday – Bankruptcy Act

happy-50th-birthday–bankruptcy-actThe month of July 2016 marks the 50th birthday since the Bankruptcy Act 1966 commenced. Much has happened over that period in terms of changes to Australia’s bankruptcy laws and whilst the writer was not even thought about when the Bankruptcy Act first commenced, in my time as an Insolvency Practitioner I have seen a few key trends / changes over the last 25 years:

  • Personal Insolvency Agreements or PTX’s whilst being more frequently used options in the 90’s to deal with a debtor’s financial position have continued to be in steady decline since the 00’s and presently are few and far between. The more readily used option these days (circumstances permitting) seems to be a Section 73 annulment. Certainly, it seems to be a more palatable option for creditors because generally speaking it provides for a longer period to undertake and complete investigations which can give creditors more confidence in making an assessment between accepting an offer versus the individual remaining bankrupt.
  • Also during the 90’s the high profile bankruptcy of Christopher Skase was “money for jam” for the media circus that ensued. The businessman fled Australia and could not be brought back to Australia. At one point radio / TV host, Andrew Denton even went about organising a fundraiser to get Skase back! As a result of the Skase bankruptcy, travel restrictions were imposed in the Bankruptcy Act (as they did not previously exist) and have subsequently been modified to where they presently sit.
  • Also during the 90’s the income contribution regime was introduced to provide a framework that whilst enabling the debtor (individual in financial difficulty) to maintain a reasonable standard of living also sought to provide a further way in which unsecured creditors could obtain recoveries for monies owed to them. For the year ended June 2015 a total amount of $40.6million was collected by Bankruptcy Trustees and the Official Receiver. Of these amounts of approximately $14.8million and $10.8million were collected from bankrupts located in NSW and QLD respectively.
  • The 90’s and 00’s have also seen the introduction / strengthening of anti-avoidance mechanisms to give Bankruptcy Trustees enhanced capability to make recoveries for creditors.
  • The late 90’s also saw the introduction of debt agreements under Part IX of the Bankruptcy – an alternative to bankruptcy for certain individuals who met the threshold limits. Typically individuals with a small exposure to consumer credit debts (ie credit cards) access this option where they desire to stay out of bankruptcy. For the year ended June 2016 a total of approximately 12,000 debt agreements were entered into (around 2002 the number was approximately 3,000). However interestingly of late, statistics reveal that the average time it takes for an individual to complete a debt agreement is in fact longer than the standard bankruptcy term of 3 years.
  • The 00’s and current decade has seen an increased interaction between the Bankruptcy Act and the Family Law Act as the rate of family breakdown increases. Such interaction continues to be a problematic area for Bankruptcy Trustees.

More recently and as I have discussed in more detail in one of my recent blogs http://www.brucegleeson.com.au/drive-thru-bankruptcies-coming-soon-to-australia/, there has been a proposal to reduce the present bankruptcy term of 3 years to 1 year.

The above is not meant to be an exhaustive list. Further, as I am not a clairvoyant I am not going to even try and guess what changes might happen over the next 25 years. However, I can guarantee there will be further amendments to the Bankruptcy Act. One thing however that I hope the Regulators do is clamp down on un-registered or un-licensed operators that continue to provide poor advice to individuals and which typically also results in less recoveries for creditors. Quite simply anyone that is giving personal insolvency advice in my view should have to be licensed.

With 4 Registered Bankruptcy Trustees, Jones Partners closely follows these trends and legislative amendments so that we can continue to provide the right advice to individuals and creditors in this complex area.

As we further celebrate the 50th birthday of the Bankruptcy Act, I have set out below a couple of other interesting facts:

  1. From 2008 to date, statistics show that approximately 40% of *personal insolvencies are in the 35-49 age group;
  1. From 2003 to date, statistics show that approximately 60% of *personal insolvencies are male; and
  1. From 2003 to date statistics generally show that NSW accounts for almost 30% of bankruptcies nationally.

[* personal insolvencies includes bankruptcies, debt agreements and personal insolvency agreements]

I will continue to watch the age group with interest because as people are living longer, they may also turn to debt to fund their lifestyles. Given that unemployment is one of the major factors resulting in bankruptcy, I believe we may start to see the next age bracket have increased numbers of bankrupts. This coupled with an increasing number of individuals having Self Managed Superannuation Funds (“SMSF”) will be interesting to monitor because in bankruptcy, an individual cannot be a trustee of their SMSF beyond the initial grace period of 6 months allowed under the SIS Act.

Further, I note with interest that personal insolvencies have increased 4.4% in 2015–16 compared to 2014–15. Queensland and Western Australia were the main contributors to this rise. This is not surprising given the continued fallout from the commodities markets – but it is the first annual rise since 2009–10! In relation to bankruptcies, they increased 0.2% in 2015–16 compared to 2014–15. Western Australia and Queensland were the only states or territories where bankruptcies increased. Again, the rise in bankruptcies in 2015–16 is the first rise since 2008–09.

Please see https://www.afsa.gov.au/resources/statistics/provisional-bankruptcy-and-personal-insolvency-statistics/annual-statistics for a more detailed breakdown of the provisional annual statistics for the year ended 2016.

Finally against the backdrop of the above, there is also some data emerging that home loan defaults are increasing slightly over the past few quarters. Again, we continue to closely monitor this type of reporting and also related aspects which help us to form views about where there may be problems ahead.

I am always happy to talk about how bankruptcy works in Australia and would welcome any opportunity to provide more information about it.

 

Bruce Gleeson

Drive Thru Bankruptcies – Coming Soon to Australia

I hope this headline has got your interest! Yes Drive Thru Bankruptcies or more correctly put 1 year bankruptcy terms were announced as part of the (1) Productivity Commission’s Report to the Federal Government on 7 December 2015 that looked at key drivers of business set-ups, transfers and closures. This proposal and other changes were reforms announced as part of the National Science and Innovation Agenda by the Prime Minister and then the subject of a (2) Proposal Paper in April 2016.
It has been expressed that Australia’s bankruptcy laws are overly punitive (when compared to other overseas jurisdictions) and that by reducing the current bankruptcy term from 3 years to 1 year that this will likely encourage greater risk taking and promote entrepreneurial activity. However when one analyses the Australian bankruptcy statistics, only about 25% of bankruptcies appear to be business related. So on this point alone, it does not make a great deal of sense that by reducing the bankruptcy period, it is going to be a game-changer insofar as spurring on entrepreneurial activity.

There is no doubt whatsoever that we need a bankruptcy regime that adequately protects and facilitates the opportunity for a recovery for creditors, but equally provides a mechanism for the individual to re-establish themselves. However, getting the balance right is paramount for all stakeholders and one wonders whether the proposed changes will achieve these aims. Additionally what is important, particularly for the individual is that they fully understand the options available to them when dealing with financial difficulty and they get advice from a suitably qualified professional.

In my experience, when an individual makes the decision to enter into bankruptcy voluntarily (or this occurs via a Court process), I would suggest the real issue that is the limiting factor in them advancing their financial position post being discharged from bankruptcy is the impact of bankruptcy (ie the event itself) on a person’s credit file, not necessarily the bankruptcy time period.

Given the proposed change in bankruptcy term and before some readers choke on their tea or coffee, what should be noted is that the proposed reduction will not change the law regarding the current “vesting of property” and “income contribution regime” provisions. However, the later provision will become more problematic because whilst a bankruptcy trustee will still be required to assess an individual’s income in years 2 and 3, adequately getting the discharged bankrupt to comply with information provisions and also pay contributions will be difficult unless the anti-avoidance provisions are sufficiently drafted. Let’s hope the drafting provides an adequate level of protection!

As mentioned, access to credit post-bankruptcy is I believe the more constraining issue presently, as a record of an individual’s bankruptcy presently remains on a commercial credit record for generally 5 years after the date of bankruptcy. The proposed changes reduce such period to 1 year. I think this period is potentially a bit skinny, but as the bankruptcy will still remain on the National Personal Insolvency Index, I suspect providers of credit will modify their application searches and act accordingly. So let’s let see if it does genuinely improve access to credit!

Whilst it can be argued that in certain bankruptcies reducing the term to 1 year will have little or no impact on creditors, I can see in other more complex bankruptcies the bankruptcy period being extended for a range of reasons. So I am not sure it is necessarily going to have the effect that the Federal Government and Legislators want. I think we need to see what is contained in the draft legislation before making further assessments, but one thing to be wary of is that there will undoubtedly be some parties that seize the moment and heavily market the new reduced bankruptcy term to individuals who are already in an emotionally vulnerable condition and therefore need the right advice to make an informed decision.

I take particular time to understand and fully explain the options to people in financial difficulty so that an informed decision can be made.

(1) http://www.pc.gov.au/inquiries/completed/business/report
(2) http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2016/Improving-bankruptcy-and-insolvency-laws

by Bruce Gleeson