Proposal to Reduce the Bankruptcy Period to 1 year

Readers may be aware that the Federal Government introduced measures which came into effect on 1 January 2021 to provide incorporated businesses (i.e., companies) with further options to deal with their financial position, particularly those that may have been impacted by the Covid 19 pandemic. Principally this relates to the introduction of the Small Business Restructuring Plan and Simplified Liquidation regimes.

However, such measures did not deal with unincorporated businesses (i.e. sole trader and partnership businesses) that have likewise been impacted by Covid 19. The Federal Government has recently sought feedback from the business community regarding a proposed reduction to the current bankruptcy term (of 3 years) to 1 year. Whilst we understand there are different views that exist about such a reduction, looking at it on balance our view is that we are amenable to such a reduction for bankruptcies provided that certain criteria (which we have called “a Simplified Bankruptcy”) are met. We believe the criteria should be:

  1. There can be no “Simplified Bankruptcy” if a Bankruptcy Notice has been issued. This in our view encourages the debtor to pro-actively engage with a specialist in order to seek advice about how to deal with their financial position. We believe this aspect is critical so that creditors are not forced to incur legal costs in pursuing outstanding amounts.
  2. We also believe that if someone has been subject to a bankruptcy administration within a 5-year period of entering bankruptcy again that they ought to be automatically disqualified from a “Simplified Bankruptcy”. Again, this seeks to act as a deterrent for those wanting to misuse the process. It should be reserved for those that genuinely are pro-active and have not been bankrupt previously.
  3. Further, it starts off as a normal bankruptcy (i.e., 3 years) and is subject to the Bankruptcy Trustee confirming within a certain period of time, i.e., say 90 days, that:
  • The liabilities are under a specific cap, for example $1million;
  • That their income and other tax lodgements are up to date, including income tax returns (this is similar to the Simplified Liquidation regime);
  • That there did not appear to be any voidable transactions that are assessed as viable to pursue under the Bankruptcy Act; and
  • And they are assessed as not being liable or likely to be liable for income contributions.

The upshot if these were accepted is that we think it would only apply to a narrow range of individuals and we think that is reasonable because it ought to be available for those that are pro-active and have not sought to divest themselves of assets that would otherwise be recoverable for creditors and are tax lodgement compliant.

If you have any feedback about the proposed bankruptcy reform, we would like to hear your feedback.