Bills Digest 10 1996-97
Bankruptcy Legislation Amendment Bill 1996
WARNING:
This Digest is prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments.
This Digest was available from 23 July 1996
CONTENTS
Bankruptcy Legislation Amendment Bill 1996
Date Introduced: 26 June 1996
House: House of Representatives
Portfolio: Attorney-General and Minister for Justice
Commencement: Proclamation, but no later than 6 months after Royal
Assent
The purpose of the Bill is to amend the Bankruptcy Act 1966 and
the Administrative Decisions (Judicial Review) Act 1977, to assist
in modernising the law on personal insolvency. Key provisions in the Bill
include simplified processes for low income minor bankruptcies, and tightening
of the provisions dealing with those who divest themselves of property
to third parties when facing bankruptcy.
[Note: In recognition of the specialised nature of bankruptcy law
combined with the significance of the proposed amendments, the following
represents an expanded Background. More specific references
to provisions in the Bill are found under Main Provisions, below.]
Australian bankruptcy law applies to an individual who is unable
to pay his or her debts. The Commonwealth's Bankruptcy Act 1966
is a law made pursuant to section 51(xvii) of the Constitution. Company
insolvency matters are regulated separately by the Commonwealth's Corporations
Law. In contrast, in the United States, bankruptcy for individuals
and insolvency for companies are covered under a single Bankruptcy Code.
Sometimes the words bankruptcy and insolvency are used interchangeably.
The matter is further complicated in Australia by the application of essentially
the same procedures for some aspects of bankruptcy for individuals and
insolvency for companies. Basically, individuals commit the act of bankruptcy
while companies become insolvent.
The primary aim of modern bankruptcy law is to enable the debtor
to identify his or her accumulated debts, make whatever contribution is
possible and then allow the debtor to make a fresh start. In earlier times
(commencing at the end of the 13th century in England), debtors could
be imprisoned for non-payment of their debts.(1)
Administration and Oversight of Bankruptcy Matters
When an individual becomes bankrupt his or her property and finances
are placed in the hands of a trustee in bankruptcy. In most cases, the
trustee is the Official Trustee (or within that system, an Official Receiver).
In a smaller number of cases, the trustee in bankruptcy is an accountant
who must be registered under the Bankruptcy Act 1966, following
his or her appointment by the Federal Court. Where no registered trustee
is available the responsibility always falls to the Official Trustee in
bankruptcy, who is a statutory appointee. Official Receivers (there is
one for every bankruptcy district in Australia) act on behalf of the Official
Trustee. Some 92% of all bankruptcies are administered by the Official
Trustee. The remaining 8% are administered by private sector registered
trustees.(2)
The administration and oversight of bankruptcy matters are carried out
by the Insolvency and Trustee Service Australia (ITSA) which is a Division
of the Attorney-General's Department. The administrative head of ITSA
is the Inspector-General in Bankruptcy. The Official Trustee is a body
corporate under the Bankruptcy Act 1966 and, as noted above, trustee
functions are carried out by Official Receivers in the various bankruptcy
districts.
The first step in the bankruptcy process is usually when a person petitions
for his or her own bankruptcy. In 1993-94 approximately 83% of all bankruptcies
resulted from a debtor's voluntary petition.(3) Alternatively, a creditor
may decide to seek the issue of a bankruptcy notice against a debtor who
has defaulted on payment of a debt.
Presently, bankruptcy notices are issued by Registrars in Bankruptcy
based in the Federal Court. In each State and Territory, the Registrar
in Bankruptcy is the District Registrar of the Federal Court. The property
of the debtor comes under the control of the trustee in bankruptcy, on
bankruptcy. There is interaction (and overlap) between ITSA and the Registrars
in Bankruptcy in formal record-keeping and documentation associated with
the administration of bankruptcy matters. To the public, however, this
system creates two separate Commonwealth bodies with whom the public must
deal i.e. the Federal Court's Registrar in Bankruptcy, and ITSA.
The Federal Court plays an essential role in the determination of rights
and obligations under bankruptcy law but it is considered that the administrative
day-to-day record keeping and documentation procedures in bankruptcy could
be handled by one agency i.e. ITSA. The Bill proposes the concept of a
One Stop Shop with the transfer of certain administrative functions
from the Federal Court to ITSA. The office of Registrar in Bankruptcy
(and Deputy Registrar) now located within the Federal Court will be abolished.
The One Stop Shop approach will also provide the opportunity to more effectively
implement an educative process in informing members of the public of the
options (including alternatives to formal bankruptcy) available when personal
insolvency occurs.
The primary aim of this reform is to allow the ordinary debtors who
voluntarily file for bankruptcy to deal with ITSA alone, and to have their
affairs processed more promptly by the one Commonwealth agency, thus avoiding
the present exchange of documentation between the Federal Court and ITSA.
A further advantage of this proposed reform is the reduction in the
number of documents which would otherwise be filed by the trustee in bankruptcy
with the Federal Court, thus reducing administrative costs.
Property and Other Transactions Prior to Bankruptcy
As part of the bankruptcy process, a debtor can be subjected to a public
examination in court as to dealings in his or her property. Certain transactions
entered into prior to the petition for bankruptcy are subject to what
is known as the doctrine of relation back. This simply means that
certain transactions are rendered void, as against a claim by the trustee,
and the money or property must be handed over to the trustee to be made
available for creditors. Basically, a bankruptcy is said to commence on
the occasion of the first act of bankruptcy within a period of 6 months
before the actual date of presentation of the petition. In certain circumstances,
other property 'settlements' dating back as far as 5 years can be challenged
by the trustee.
In the matter of settlements of property prior to bankruptcy, some transactions
may appear to have depleted the now bankrupt's assets. The law, at present,
looks to the intention of the parties and the nature of the settlements.
The Bill proposes to change the test for determining whether these prior
settlements are immune from claims by the trustee for the benefit of creditors,
by introducing a simpler test. If the now bankrupt transferred property
to another person for no consideration or for less than the market value,
those transactions (which occurred prior to bankruptcy) can be subject
to a claim by the trustee. The test will be one of whether at the time
of the transfer of the property the now bankrupt was solvent (nb:
the Bill inserts the definition of 'solvent' from section 95A of the
Corporations Law - see Item 20 in Schedule 1 to the Bill.
See also, Items 213 and 327).
The proposed amendments will now place the emphasis on the likely effect
on creditors of that earlier transaction. There are limited exemptions
to recognise that some specified transactions are permissible and these
include a transfer to meet all or part of a liability under a maintenance
agreement or maintenance order (See Item 213 in Schedule 1 to the
Bill).
Insolvency Administrations Outside of Actual Bankruptcy
Under the existing Bankruptcy Act 1966, a person who is facing
a serious financial crisis may enter into what is known as a Part X arrangement,
which is a step short of actual bankruptcy. Part X, presently, offers
three options. The options are:
- a deed of assignment - the debtor's property is handed to a
trustee who divides the property for the benefit of the creditors; the
debtor is released from those debts which would otherwise have comprised
his or her bankruptcy;
- a deed of arrangement - the debtor's financial affairs are
administered for him or her which may include running the debtor's business
or assigning future income; and
- a deed of composition - creditors accept less than the full
amount of the debt as full satisfaction, or agree to a schedule of instalments.
The Bill proposes amendments which will simplify the procedures involved
in establishing and administering Part X arrangements. The functions of
a solicitor or trustee to whom the debtor issues an authority to deal
with the debtor's property will be made uniform. At present, different
procedures apply when a solicitor acts compared to a registered trustee.
The practical result, however, to the creditors and the debtors is the
same.
The Bill also proposes to establish a conclusion to the time that a
debtor's property is subject to control under a Part X arrangement. At
present, control over the debtor's property can continue indefinitely
if creditors do not agree to release the debtor's property.
A new form of debt administration will be introduced. This is a simplified
form of a Part X arrangement and it will be known as a Part IX - Debt
Agreement. This simplified process will apply to debtors whose level
of liability is below about $52,000 (i.e. 7 times the basic rate for a
partnered pension - this threshold figure is also indexed to movements
in the basic pension rate, and may be varied by Regulation). The proposed
simplified process will not necessarily utilise a trustee but can operate
by a simple circulation by the Official Trustee of a debtor's proposal
for a payment of less than the full amount, periodic payments or obtaining
financial advice. The option of the formal appointment of a trustee, however,
still remains. The Official Trustee will examine the debtor's proposal
to determine whether it is an arrangement which is likely to be acceptable
to creditors.
Voting on acceptance of the debtor's proposal requires a resolution
representing 75% of the value of the debt and a majority of the creditors.
Duties of Trustees
The Bill introduces new duties for trustees. Essentially, these duties
impart a more commercial orientation on trustees in bankruptcy. In simple
terms, a trustee will be required to report to creditors within 3 months
on the specific issue of whether creditors can expect a dividend. In addition,
trustees will be required to administer bankrupt estates with a duty to
avoid unnecessary expense.
A further modification in the Bill is the proposal that the Inspector
General becomes the sole registering authority for trustees. At present,
primary registration is a function of the Federal Court. In addition,
the lodgement of an up-front bond by trustees will be replaced with a
system of insurance.
Income Contribution from Bankrupts
A key proposal in the Bill is the revision of Division 4B of Part VI
of the Bankruptcy Act 1966 following the majority decision of the
Federal Court in the case of Bond v Trustee of Property of Bond (A
Bankrupt) (1994).(4) An explanation of that decision can be found
in the Parliamentary Research Service's Current Issues Brief Income
Contribution from Bankrupts: A Recent Federal Court Decision.(5) It
is important to note that Mr Alan Bond is no longer a bankrupt and the
discussion of his case in this Bills Digest relates only to the issues
involving the provisions of the Bankruptcy Act 1966 and the proposals
in the Bill. Mr Bond was released from bankruptcy in late February 1995.
The income contribution scheme was introduced into the Bankruptcy
Act 1966 in 1992 and commenced operation on 1 July 1992. Basically,
the scheme provides that a bankrupt who, through expertise, professional
calling or fringe benefits, is able to continue to receive a comparatively
high income or enjoy a comparatively affluent life style while technically
bankrupt, then he or she should contribute some of that 'excess' income
to his or her creditors.
Stated simply, a formula was applied which established a permissible
income threshold based on 3.5 times the basic pension (with some increase
for dependents or child support) the amount of excess income above that
threshold is divided by two with one half going to creditors via the trustee.
As a rule of thumb, once a bankrupt starts receiving in excess of $26,000
per annum (after tax, where applicable) he or she is liable to make an
income contribution of half of the amount above $26,000.
In the Bond v. Trustee of Property of Bond (A Bankrupt) case,
the trustee classified the provision of over $700,000 in terms of housing,
office expenses, travel, telephone and legal expenses to Mr Bond by family
and associates of Mr Bond as fringe benefits and therefore income related.
An assessment was made by the trustee (Mr Ramsay) of a substantial income
contribution to be made by Mr Alan Bond. On appeal to the Federal Court,
a majority 2:1 decision found in favour of Mr Bond. The $700,000 worth
of payments were held to be gifts. The Federal Court decision says that
the definition in the Bankruptcy Act 1966 is confined to
payments made in the context of employment. The correction of the existing
provision in the legislation is addressed by this Bill.
The Bill attempts to restore what was intended in the original amendments
in 1992 dealing with income contribution from bankrupts and the provision
will now also cover loans to bankrupts. See Items 252-256 in Schedule
1 to the Bill.
Digest Comment: Retrospectivity
The proposals in the legislation are commendable in that they aim to
streamline procedures under the Bankruptcy Act 1966 and make the
system of bankruptcy law more effective and less costly. There is one
issue which should be noted and that is that bankruptcy involves, by definition,
a retrospective process. Consequently, any significant modification to
the law produces a retrospective effect. In simple terms, there may have
been property settlements which previously complied with the law as it
then stood but which will now be open to closer scrutiny by these amendments.
On one view, such a development is overdue because of the apparent ease
in which a small number of bankrupts may have been able to alienate significant
assets from the reach of creditors. The retrospective effect is, however,
noted.
Also noted is that the retrospective effect for this proposed legislation
will be confined to new bankruptcies after the commencement of the amending
legislation. The options available to the Government were immunity from
retrospectivity; alternatively, complete retrospectivity for all bankruptcies
including current bankruptcies which are still within the relation back
period; or, a middle course, confining the retrospective effect only to
new bankruptcies after the commencement of the legislation. The Bill utilises
the middle course with the revised provisions applicable to all new bankruptcies
after the commencement of the amending Act.
[This Bill largely restates the provisions of the Bankruptcy Legislation
Amendment Bill 1995 which was originally introduced into the House of
Representatives on 8 March 1995 but which lapsed in the Senate when the
Parliament was prorogued for the 1996 General Election. During its previous
passage the earlier Bill was examined by the Senate Legal and Constitutional
Legislation Committee in its report, Bankruptcy Legislation Amendment
Bill 1995, of September 1995. This Bill contains changes resulting
from the acceptance of the recommendations contained in the majority report
of the Committee.]
[This Bill implements the proposed amendments by way of Schedules
to the Bill. Consequently, the Main Provisions will be referred
to as Items in the Schedule rather than as Clauses in a
Bill.]
Schedule 1 to the Bill
Item 1 removes from subsection 9(4) of the Administrative
Decisions (Judicial Review) Act 1977 the conferring of Commonwealth
jurisdiction on State courts to review conduct or a decision made under
the Bankruptcy Act 1966. Essentially, this is the process for review
of administrative decision-making. Such matters will now be confined to
the Federal Court of Australia and the High Court. A bankruptcy matter,
per se, will still be able to be dealt with by the Supreme Courts
under Commonwealth cross-vesting legislation, in appropriate cases.
Items 2-20 insert a number of new or modified definitions into
the Bankruptcy Act 1966. These definitions include statutory recognition
of the National Personal Insolvency Index (NPII). This is an index
of bankruptcy and insolvency matters available for public inspection.
An index has been available in the past but it was an administrative arrangement
rather than a formal requirement under the legislation (see Item 9
and proposed new section 315 at Item 451).
Item 21 inserts a proposed new section 5AA which provides a reference
table for identifying the 'place of origin' for a bankruptcy matter. For
example, the most common form of bankruptcy is a voluntary petition by
the debtor. The place of origin will be the Bankruptcy District in which
the petition is lodged. A Bankruptcy District, presently, equates with
a State or Territory. This means that if a debtor lodges a petition in
Sydney and the petition is accepted, the place of origin for the administration
of the bankruptcy is the Bankruptcy District of the State of New South
Wales. Official Receivers will be able to delegate their powers to each
other in respect to a particularly bankruptcy where, say, circumstances
change and for practical purposes it is more convenient to attend to a
matter in another Bankruptcy District.
Item 43 provides authority for the Inspector-General in Bankruptcy
to have general administration of the Bankruptcy Act 1966 combined
with a general power of delegation to an officer of the Department.
Item 57 repeals the power of the Governor-General to declare
Bankruptcy Districts and replaces that with a power for the Inspector
General in Bankruptcy to perform that function. The purpose of the amendment
is to provide administrative simplicity.
Item 59 provides an amendment to existing section 15 of the Bankruptcy
Act 1966 to expressly make generally reviewable, by the Court, an
Act done by an Official Receiver e.g. rejecting a debtor's petition for
bankruptcy. Previously, actions done by an Official Receiver were reviewable
only in specified circumstances.
Item 74 is a re-statement of the duties of trustees with the
addition of some more contemporary duties such as the need to report to
creditors within 3 months of the bankruptcy on the likelihood of the creditors
receiving a dividend. In addition, a trustee will be under a duty to investigate
and take steps to recover any property which the trustee can show was
transferred by the now bankrupt and that transfer is void against the
trustee. A trustee will also be under an express duty to administer a
bankrupt estate efficiently and with a regard to commercially sound practices.
These proposed amendments appear timely.
Item 89 contains proposed amendments which confine the jurisdiction
in bankruptcy matters to the Federal Court (and, of course, the High Court).
Technically, State Courts will still be able to deal with bankruptcy matters
under the Commonwealth's cross-vesting legislation but, in practice, very
few matters are now initiated in a State Court. In 1994, only one matter
was known to have been initiated in a State court.
Item 103 contains a proposed amendment which has the effect of
recognising that the act of bankruptcy (in the administrative sense) commences
with the filing of documentation with the Official Receiver, in lieu of
the Registrar in Bankruptcy in the Federal Court. Item 105 supplements
the circumstances which constitute acts of bankruptcy to include recognition
of the proposed new provisions dealing with a debt agreement proposal
(the proposed new Part IX arrangement for minor debtors).
Bankruptcy should not be used to enforce recovery of trivial debts.
Under the existing law, the debtor's liability must be at least $1,500.
Items 114 and 123 lift that threshold figure to $2,000.
Item 155 repeals and replaces provisions dealing with the presentation
of a debtor's petition against a partnership. The existing provisions
have been rewritten mainly to recognise that the power to deal with petitions
will reside with the Official Trustee in lieu of the Registrar of the
Court. Likewise, Item 158 proposes similar amendments for joint
debtors who are not partners.
Item 177 proposes an expansion of the powers of the Official
Receiver when gaining access to premises and books for the purposes of
the Bankruptcy Act 1966. The Official Receiver will be able to
remove books in lieu of just copying pages or making an extract. Item
178 will allow the Official Receiver or an authorised officer to authorise,
in turn, the attendance of a registered trustee (and accompanying person
nominated by the registered trustee) to assist in the identification of
relevant documentation. Previously, a registered trustee was confined
to an attempt at identifying the documents to the Official Receiver whose
task it was to then access the premises and examine the books.
Item 203 provides a table to assist in determining the date on
which bankruptcy commenced. Under the present law, it is technically possible
for a debtor, in certain circumstances, to artificially reduce what otherwise
would have been an earlier date for the commencement. This situation was
created when a debtor who had a creditor's petition pending would subsequent
petition separately as a voluntary bankrupt. Where this situation occurred
it was necessary for the earlierintime creditor to apply to the Court
to have the later-in-time debtor's petition annulled. The time for commencement
of the bankruptcy is, in some cases, critical because it governs the period
of relation back (i.e. transactions prior to the date of the petition
which can be subject to a claim as void against the trustee). The proposed
amendments aim to close that loophole.
Item 213 is key provision in the Bill. Under existing bankruptcy
law certain property transfers occurring up to 2 or, in some other cases,
up to 5 years before the commencement of bankruptcy can be challenged
on the basis that the transfer was made to deprive creditors of assets
that might otherwise have been included in the now bankrupt's estate.
The Bill is a direct challenge to property settlements which are undervalued
or made in circumstances in which the now bankrupt was at the time of
the transfer insolvent. In principle, there is little objection to the
tightening of bankruptcy law so that artificial property transactions
aimed at defeating creditors are rendered void as against the trustee.
As noted above, there is the issue of retrospectivity in relation
to those additional undervalued property settlements dating back up to
5 years before the commencement of the proposed amendments. In simple
terms, the amendments will add to the range of antecedent transactions
which can be challenged by the trustee in bankruptcy for the benefit of
creditors and the practical affect of the amendments is retrospective.
Items 252 to 265 are the most topical amendments in the Bill. These
proposed amendments are aimed at rectifying the said deficiencies in the
1992 amendments concerning income contributions from bankrupts. The Federal
Court in Bond v Trustee of Property of Bond (A Bankrupt) (supra)
ruled by a majority 2:1 that the 1992 amendments, in so far as they dealt
with the meaning of income, were not as broad in their reach as was originally
intended. This issue has been discussed above in the Background under
Income Contribution from Bankrupts.
The key proposal (Item 256) is to amend the definition of 'income'
in section 139L of the Bankruptcy Act 1966. The main issues arising
from the proposed amendment is the addition of words which more clearly
identify, as included in the concept of income, the value of a benefit
that is provided in any circumstances to the bankrupt and a new category
of a loan made to the bankrupt.
Hon Justice Cooper in Bond v. Trustee of Property of Bond (A Bankrupt),
commented that in its existing form, the Bankruptcy Act 1966 could,
on the interpretation promoted by the trustee in bankruptcy, arguably
include legal aid as 'income'.(6) When the forerunner of this Bill was
introduced into Parliament in 1995, the modifications to the definition
of 'income' did not specifically address the problem identified by Justice
Cooper. The Senate Legal and Constitutional Legislation Committee in its
report, Bankruptcy Legislation Amendment Bill 1995, in September
1995, recommended that payments such as legal aid should be specifically
excluded from the definition of income.(7) The Bill (now reintroduced)
has adopted the Senate Committee's recommendation (see the concluding
paragraphs of Item 256).
Item 288 contains proposed amendments which transfer the registration
of trustees from the Registrar in Bankruptcy in the Federal Court to the
Inspector-General in Bankruptcy. Under the present legislation, the suitability
of an applicant is the subject of a report by the Official Receiver to
the Registrar (in practice, this report is prepared by a committee which
includes a representative from the private registered trustee sector).
Under the proposed amendments, the suitability of the applicant will be
the subject of a report from a committee convened by the Inspector-General
in Bankruptcy. That committee will include a representative from the private
sector. Decisions on registration may be reviewed by the Administrative
Appeals Tribunal. Registration has effect for 3 years.
Item 325 contains a significant proposed addition to bankruptcy
law in Australia. It is proposed that a debtor with liabilities below
about $52,000 (i.e. 7 times the basic rate for a partnered pension) has
the option of entering into what will be know as a Part IX - Debt Agreement.
This is an arrangement short of actual bankruptcy.
[Digest Comment: The basic rate of partnered pension is indexed and
it varies on a 6 monthly basis in line with CPI increases. There is a
minor discrepancy in the Explanatory Memorandum to the Bill concerning
the calculation in paragraph 46 and paragraph 135.12 and paragraph 135.16.
The current threshold figure should be in the order $52,000. The figure
varies because of 6 monthly indexation.]
In most cases, the 'minor' debtor will lodge a written proposal with
the Official Trustee who will consider how the debtor proposes to deal
with his or her insolvency problem. The Official Trustee in processing
the proposal will either call a meeting of creditors or write to the creditors
known to the Official Trustee seeking views on whether the proposal should
be accepted. A special resolution by creditors is required to accept the
debt agreement. The resolution must be passed by a majority of creditors
representing 75% in value of the debts owed to creditors. As a safeguard,
it is open to a debtor, creditor or Official Trustee to apply to the Court
for an order terminating a debt agreement (see proposed new section 185Q)
or declaring a debt agreement void (see proposed new section 185T).
The effect of Official Trustee's acceptance of a debt agreement proposal
means that it is then listed formally on the National Personal Insolvency
Index (NPII). Once listed, the debts are then frozen and there is a stay
on enforcement action by creditors.
This form of debt resolution is not available to a person whose income
is twice the threshold amount specified in the provisions relating to
income contributions from bankrupts. In simple terms, if the minor debtor
earns an annual salary of $52,000 or more, then a Part IX debt agreement
is not available (see proposed new section 185E).
[Digest Note: The Explanatory Memorandum to the Bill identifies the
base income threshold for income contribution from a bankrupt at $26,013.26
and calculates twice that figure as $48,812.40 - see paragraph 135.16
of the Explanatory Memorandum. This Digest assumes that the figure should
be about $52,000.]
This proposed system is akin to bankruptcy in that once a debt agreement
is accepted, the creditors are limited in regard to any separate legal
action for recovery of the debt. A satisfactory conclusion to the agreement
(e.g. paying 70 cents in the dollar to settle the debts) releases the
debtor from liability for the debts. The debtor may ask the Official Trustee
to issue a certificate confirming that the debtor has satisfied his or
her obligations under the Debt Agreement. Decisions by the Official Trustee
to accept or not accept a debt agreement proposal will be reviewable by
the Administrative Appeals Tribunal.
The present bankruptcy law already includes Part X - Arrangements
with Creditors Without Sequestration which is used extensively to
administer the debtor's affairs without the application of the strict
code (and to some extent) stigma of bankruptcy. Formal bankruptcy also
imposes a number of personal inconveniences on a bankrupt (e.g. the need
to disclose the existence of the bankruptcy when seeking credit). The
proposed Part IX - Debt Agreement system will provide a simplified
form of administration of minor debtors similar to the existing Part X
system. For example, a Part X arrangement can only be commenced by the
debtor giving a written authority to a registered trustee or a solicitor.
Essentially, the debtor's property then falls under the control of the
registered trustee. The simplified approach under proposed Part IX will
create an arrangement where it may not be necessary to have a trustee
at all e.g. the debt agreement is sufficient in itself to satisfy the
control of the funds or assets necessary to reduce the minor debt (Part
IX only applies to debts below $52,000).
[Digest Note: On balance, a simplified administrative process for
minor debtors is commendable.
An issue which requires noting is the Dissenting Report by Senators
Abetz, Ellison and O'Chee to the report of the Senate Legal and Constitutional
Legislation Committee (Bankruptcy Legislation Amendment Bill 1995 - September
1995). The Senators, dissented over the informality of the Part IX - debt
agreement scheme. Essentially, the scheme will operate in the absence
of an appointed trustee in bankruptcy. The Senators observed that there
was scope for insufficient formal control over the property and financial
affairs of the debtor. It was suggested by the Senators that this can
give rise to disputes which are not in the interests of the creditors
or the debtor. The appointment of a trustee increases the cost of the
scheme. The Senators acknowledged that the aim of the proposed new scheme
was to create a low cost alternative to bankruptcy for minor debtors(8)
On 28 June 1996, Senator O'Chee informed the Senate that the Selection
of Bills Committee had resolved to refer this Bill to the Senate Legal
and Constitutional Legislation Committee to look at the new amendments
in terms of the Government's response to the September 1995 report of
the Committee. The proposed reporting date is on or before 22 August 1996.(9)]
Item 326 commences a proposed set of amendments to revise
the existing provisions of Part X - Arrangements with Creditors Without
Sequestration. As noted above, this Part of the Bankruptcy Act
1966 provides a system for a debtor to make arrangements with his
or her creditors one step short of actual bankruptcy. A Part X arrangement
has more formalities than the proposed new Part IX debt arrangement which
is confined to low income minor debtors. The proposed amendments to existing
Part X are an attempt to streamline the provisions and to introduce overdue
measures e.g. the period of control (supervision of the debtor's property
by a registered trustee) under which the debtor must operate will come
to an end by operation of law. At present, the control period can continue
indefinitely if creditors do not agree to the Part X proposal. These amendments
appear to be practical.
[Digest Note: There remains what is probably a minor but unresolved
concern as to whether the concentration of certain functions within an
administrative system dealing with bankruptcy and personal insolvency
is constitutional. In evidence to the Senate Legal and Constitutional
Legislation Committee, Mr Anthony Morris QC, queried whether the effect
of proposed new section 204A (Item 356) infringed Chapter III of
the Constitution. Basically, the concern is that the legal effect of the
creditors' special resolution under the proposed revisions to Part X can
be to render a debtor bankrupt, a function which should be reserved to
a Court. In other words, it is not up to a meeting of creditors (a non-judicial
body), in essence, to declare a person to be bankrupt. The Senate Committee
noted the issue raised by Mr Morris QC and suggested that it warranted
further consideration including specific advice on this matter be from
the Office of General Counsel within the Attorney-General's Department.(10)
The issue does not appear to be canvassed in the revised Explanatory Memorandum
to the Bill but may have been the subject of a supplementary departmental
submission to the Senate Committee. It is possible that this issue will
be clarified in the current examination of the new Bill by the Committee.]
Item 394 commences a series of proposed amendments to Part XI
- Administration of Estates of Deceased Persons in Bankruptcy in
the existing Bankruptcy Act 1966. The proposed amendments are minor
and include consequential amendments arising from modifications to other
provisions in the Bankruptcy Act 1966 included in this Bill (e.g.
reference to the proposed new section 204A, discussed above).
Items 411 to 414 contain proposed amendments to Part XIA - Farmers'
Debts Assistance in the Bankruptcy Act 1966. This part of the
Act deals with the interaction of Commonwealth, State and Territory laws
dealing with farmers' debt adjustments, rural reconstruction grants and
rural adjustment grants. Under the existing Act, the relevant authorities
responsible for these schemes interacted with the Registrar of the Court
in matters where there is a stay on proceedings concerning farm debts.
The proposed amendments in the Bill implement the shift in bankruptcy
administration functions from the Registrar of the Court to the Official
Receiver.
Item 418 contains a proposed amendment to Part XII - Unclaimed
Dividends or Money in the Bankruptcy Act 1966. The proposed
amendment is to section 254(4) of the Bankruptcy Act 1966 and its
effect is to remove from the Minister the authority to pay to a claimant
an entitlement specified in an order of the Court as moneys due to the
person. These situations arise when the Official Receiver of a trustee
in bankruptcy has been unable, at the time of the administration of a
bankrupt estate, to trace a person to whom money is owed. The money is
then paid into the Consolidated Revenue Fund. Subsequently, the person
may come forward as a claimant and lodge documentation with the Court
for recognition and payment of their entitlement. The justification for
the proposed amendment is that the Minister already delegates that function
to the Official Receiver and the proposed amendment removes the need for
the renewal of the delegation (see paragraph 181.2 of the Explanatory
Memorandum to the Bill). This proposed amendment further concentrates
the administration of bankruptcy in the Official Receiver.
Item 427 proposes the repeal of existing section 263C of the
Bankruptcy Act 1966 and its replacement with a new provision. The
existing section 263C makes it an offence for a person (creditor) to give
a false or misleading statement to the Chairperson of a meeting of creditors.
The existing penalty is $1,000 or imprisonment for 6 months, or both.
The proposed new section 263C modifies the provision to make the offence
applicable when a false or misleading statement is given in a creditor's
statement (section 64D) to a trustee in bankruptcy. The penalty is simply
stated as imprisonment for 6 months.
Item 451 contains a proposed revision of the Governor-General's
Regulation-making powers to add a specific reference to allow the prescription,
by Regulation, of the National Personal Insolvency Index (NPII). In
practical terms, this is simply a formalisation by subordinate legislation
of what has been an administrative process of keeping an index of the
names and financial details of persons who have become bankrupt. This
index is available for public inspection. The information is now stored
on a database called the Bankruptcy Index Online System (BIOS). The key
issue is that the coverage of the Index by Regulations will mean that
the record keeping practices will be subject to scrutiny by Parliament
via its examination of subordinate legislation. The proposed amendments
appear sensible and practical.
Items 453 to 514 are transitional provisions arising from the
significant amendments proposed by this Bill.
Schedule 2 to the Bill
This Schedule simply deals with proposed amendments which are aimed
at making the Bankruptcy Act 1966 gender neutral.
Recommended Reading
The Explanatory Memorandum to the Bankruptcy Legislation Amendment
Bill 1996 is highly recommended. It is an exceptional piece
of work which contains a useful section on Policy Objectives (pp.
4-31 of the Explanatory Memorandum to the Bill).
Rose, D. Lewis: Australian Bankruptcy Law, 10th Edition, The
Law Book Company Limited, Sydney, 1994.
1. In 1702, a modification was permitted to allow debtors to be discharged
from prison if they enlisted in the Army or Navy. In 1813, the Insolvency
Act was passed in England to give relief against imprisonment after
being in custody for 3 months. See Rose, D. Lewis: Australian Bankruptcy
Law, 10 Edition, The Law Book Company, Sydney, 1994: 9.
2. Explanatory Memorandum to the Bankruptcy Legislation Amendment
Bill 1996: 6.
3. ibid: 7.
4. (1994) 125 ALR 399
5. Bailey, B. Income Contribution from Bankrupts: A Recent Federal
Court Decision, Parliamentary Research Service, Current Issues Brief
No. 25 of 1994.
6. (1994) 125 ALR 399, 419-420.
7. Australia, Senate Legal and Constitutional Legislation Committee,
Bankruptcy Legislation Amendment Bill 1995, September 1995: 58-60.
8. ibid: 67-68
9. Australia, Senate, Hansard, 28 June 1996: 2549.
10. op cit: 34-36
Brendan Bailey Ph. 06 277 2434
19 July 1996
Bills Digest Service
Parliamentary Research Service
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ISSN 1323-9032
© Commonwealth of Australia 1996
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