INSOLVENCY ALERT: Potential bankruptcy period reduction

23 October 2017

Publications

Last week the Commonwealth Government introduced a Bill to reduce the period of bankruptcy from 3 years to 1 year.

On 19 October 2017, the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (Bill) was introduced into the Senate. The Bill is for the Bankruptcy Amendment (Enterprise Incentives) Act 2017 (Amending Act) which, if enacted, will amend the Bankruptcy Act 1966 (Act).

The proposed reforms aim to reduce the stigma associated with bankruptcy and foster entrepreneurial behaviour. If the Amending Act is passed, the amendments will commence six months after the Amending Act receives Royal Assent.

This Alert summarises the key amendments, should the Amending Act become law.

1. The key change – bankruptcy period reduction

The key amendment to the Act will be that the default period of bankruptcy under s.149 will be reduced from 3 years to 1 year, for people who become bankrupt after the Amending Act comes into force. This means that other time periods associated with bankruptcy will also be reduced to 1 year, including disclosure of bankrupt status to potential creditors, seeking permission for overseas travel and attaining certain licences and entering certain professions. Objections to discharge will still be able to be lodged by the Official Receiver or trustee in order to extend the default period of bankruptcy.

2. Certain obligations to continue beyond date of discharge

The following obligations (among others) will no longer apply only during the period of bankruptcy, but will instead continue for a ‘prescribed period’ (which is the longer of the period of bankruptcy, the period of 3 years from the date on which the bankrupt filed the bankrupt’s statement of affairs, and the period for which the bankrupt remains liable to make income contribution payments to the trustee):

  • A bankrupt’s obligations under s.265 of the Act to disclose to the trustee information about the bankrupt’s property, dispositions of property, conduct and examinable affairs, and not to engage in various prohibited transactions in relation to the bankrupt’s property; and
  • A bankrupt’s obligations under s.277A of the Act to keep and retain books that record and explain the bankrupt’s income, transactions and other financial affairs during the period of bankruptcy. Both discharged and undischarged bankrupts will be required to keep and retain books for the prescribed period.

The above changes will ensure that trustees retain the ability to administer a bankruptcy throughout the entire period that a bankrupt is required to make income contribution payments, even if a bankrupt has already been discharged.

3. Bankrupt’s income contribution obligations

Various changes will be made to Part VI Division 4B of the Act, which deals with a bankrupt’s obligations to make income contribution payments to the trustee. In summary, these amendments will provide that discharged bankrupts who are assessed by a trustee as liable to make income contribution payments will continue to be liable to make those payments for a further 2 years beyond the default 1 year period of bankruptcy. Where a bankruptcy is extended because of non-compliance, the obligation to make income contribution payments will continue for a period of 5 to 8 years beyond the date of discharge.

Further, the definition of ‘bankrupt’ for the purposes of Part VI Division 4B will be amended to include discharged bankrupts.

4. Application of Amending Act to undischarged bankrupts

Where a person is a bankrupt immediately before the Amending Act commences, the date of their discharge from bankruptcy will depend on the period of time that has elapsed between the date the bankrupt filed their statement of affairs and the commencement day of the Amending Act. If that period of time is less than 1 year, the bankrupt will be discharged from bankruptcy at the end of 1 year from the date they filed their statement of affairs. If the period is 1 year or more, the bankrupt will be discharged on the commencement day. However, the period of bankruptcy may be extended in accordance with any objections filed prior to the commencement day, and those extensions will remain in place once the Amending Act comes into force.

Summary and further advice

The significant reduction in the default period of bankruptcy will potentially result in objections to discharge coming more sharply into focus. It will become increasingly important for trustees to lodge objections to discharge where they believe a bankrupt is a financially irresponsible person who will not be able to appropriately manage his or her own affairs after 1 year. However, the reforms will also provide greater opportunity for bankrupts to get back on track and resume business where this is the appropriate course.

If you require advice in relation to the potential impact of the Amending Act on your affairs or those of a bankrupt whose estate you are administering, please contact:

James Daniel | Partner | +61 7 3338 7519 | jdaniel@tglaw.com.au

Brock Morgan | Senior Associate | +61 7 3338 7566 | bmorgan@tglaw.com.au