Chapter 4
Committee view
4.1
As noted by the Attorney-General's Department (the Department), 'both
bills share a common purpose in seeking to modernise and improve the
accessibility of their respective debt management mechanisms.'[1] Additionally, both bills aim to strike a careful balance—in the case of the
Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (BAEI bill), a balance
between encouraging entrepreneurial activity, and providing protection for
creditors and regulators; in the case of the Bankruptcy Amendment (Debt
Agreement Reform) Bill 2018 (BADAR bill), a balance between safeguarding the
interests of debtors and the interests of creditors, while also ensuring an
accessible debt agreement regime.
4.2
The committee is keen to ensure that legislative amendments take into
account that creditors are often the losers in bankruptcy action, and that to
the extent possible, creditors should be protected.
4.3
As noted by a number of submitters, the proposed changes to each of the
bills may affect the operation of the other. A key concern was that the
proposed amendments to the BADAR bill may make debt agreements less viable for
many debtors, while concurrently, the proposed amendments to the BAEI bill may
result in bankruptcies being a more favourable option and potentially open to
abuse. However, as noted by a number of submitters, the intention of the
personal insolvency regime is to provide options to different situations.
Different eligibility requirements and restrictions exist for bankruptcy as
compared to debt agreements.
4.4
In considering each bill, the committee has thus sought to consider the
evidence in the context of the bankruptcy scheme at large, particularly noting
the impact minor changes proposed in each of the bills may have on the
provisions of the other, or on other alternatives under the Act.
BAEI bill
Reduction of the default period
4.5
The committee notes and shares the concerns raised by submitters in
relation to the reduction of the default period. The committee in particular
notes the various potential means of differentiating between business and
personal bankruptcies suggested by submitters. However, the committee has
weighed this evidence against advice from the Department which suggested that
it was impractical and potentially impossible to achieve a true distinction
between the two types of bankruptcies. The committee is also mindful that the
causes of bankruptcy are often multifaceted and may not be clearly identified
through statistical data.
4.6
The committee finds that the evidence on balance suggests that a one
year default period is appropriate, at least for some classes of bankruptcy,
having regard to the issues raised and the aims of the bill. However, the
committee strongly encourages the government to consider the comments and
recommendations made later in this section, which are aimed at ameliorating
some of what the committee, and many submitters, saw as the potential risks in
curtailing the current default period.
Anti-abuse provisions
4.7
The committee is satisfied that the protections offered by the bill,
primarily the trustee's ability to object to discharge of bankruptcy and the
enforcement of the three year income contribution obligation period, are
sufficient to provide protection against abuse. The committee notes in
particular that the proposals in respect of income contribution obligations
were generally supported by submitters.
Amendments to other legislation
4.8
The committee notes that many submissions recommended changes to other
legislation, such as the Corporations Act 2001, in response to the
amendments made in this bill. In particular, the committee notes, and was
impressed by, the recommendations made by the Australian Securities &
Investments Commission (ASIC). The committee considers that the recommendations
made by ASIC are prudent and that the Government should implement these
recommendations, or others that would operate similarly.
4.9
Submitters warned the committee that the reduction of the default period
would not change certain legislative and industry requirements to disclose a
bankruptcy or the repercussions of having been bankrupt. The committee notes
that this inconsistency has the potential to cause confusion for bankrupt
persons. Furthermore, the committee recognises that this may have significant
effects for entrepreneurs, such as when securing credit. The committee trusts
that the Government will remain mindful of the potential need for further
legislative amendment to fully realise the stated aims of the current bill.
Technical amendments
4.10
The committee notes the recommendations from the Law Council of
Australia in relation to technical amendments to enhance clarity and considers
that there may be merit in the Law Council's recommendations.
Recommendation 1
4.11
The committee recommends that the Government give positive consideration
to the suggestions from ASIC to amending the Corporations Act 2001 (Cth), to ameliorate the risk of the one-year default period being made
available to bankrupts for whom such a concession is not a desirable or
justifiable outcome.
Recommendation 2
4.12
Subject to the foregoing recommendation the committee recommends that
the Senate pass the BAEI bill.
BADAR Bill
Debt agreement administrators
4.13
With the increase in popularity of debt agreements, one of the BADAR
bill's aims is to increase the public's trust and confidence in debt agreement
administrators. The committee considers that the proposed amendment to limit
the type of practitioners who are able to administer a debt agreement, along
with enabling the Attorney‑General to set industry conditions for
administrators, will assist to boost confidence in the professionalism of
administrators.
4.14
The committee notes the various recommendations made by a number of
submitters including requiring debt agreement administrators to:
- complete formal training on personal insolvency, including
undertaking ongoing formal education;
- hold membership of a professional body with a commitment to a
Code of Conduct;
- provide more information to debtors prior to entering into a debt
agreement as well as at other stages of the debt agreement; and
- join the Australian Financial Complaints Authority, once
established.
4.15
While the committee makes no specific recommendation in respect of these
suggestions, it notes that the suggestions have merit and that the
professionalism of the debt agreement regime may benefit from further
regulation.
Three year limit
4.16
In relation to the proposed introduction of a three-year limit to debt
agreement proposals, the committee is of the view that this is a potentially
useful measure to minimise the chance of debtors entering into unsustainable
debt agreements. The committee has given careful consideration to the concerns
raised by submitters—that the three year limit will result in one of two
things—creditors rejecting debt agreement proposals due to the potential
decrease in return; or fewer debtors being able to service a debt agreement due
to an increase in payments.
4.17
The committee notes that currently, a majority of debt agreement proposals
(85 per cent in 2016-2017) ran for five years and notes that creditors will in many
circumstances achieve less return if agreements are capped to a maximum of
three years. While acknowledging that differences in the respective cohorts
make direct comparisons problematic, the committee also notes that, based on
the statistics from AFSA and the Department, on average creditors currently
receive 59.68 cents per dollar owed under debt agreements and only 1.15 cents
per dollar under bankruptcies. While creditors will continue to receive more
under a three year term debt agreements than they would under a bankruptcy
scenario, the relative success of the existing arrangements—which typically run
over five years—cannot be ignored, especially in respect of the enhanced
returns to creditors that a longer term can offer.
4.18
The committee also notes evidence from submitters about the rigidity of
the proposed reform noting that sudden changes to a debtor's circumstances
should be accounted for by including a greater degree of flexibility in the arrangements.
Having regard to the views and concerns expressed by submitters the committee
considers that while an initial three year cap is reasonable and appropriate,
the bill should provide for more flexibility. Specifically, the committee
recommends that the bill provide for extensions of up to an additional two
years to the term of debt agreements, to be made by agreement between debtors,
creditors and debt agreement administrators. This would provide for a debt
agreement originally running for one year to be extended to a maximum of three
years, or a three year agreement implemented under the three year initial cap
being able to be extended to run for a maximum of five years in total.
Payment to income ratio
4.19
The committee is equally of the view that the introduction of the
payment to income ratio is a useful measure to help ensure that debtors are not
signed up to unsustainable agreements. While the committee notes that there are
other methods of ensuring that debtors do not sign up to debt agreements which
they cannot afford, the committee considers that the payment to income ratio
will offer some assistance to debtors from undertaking excessive payment
schedules. Nonetheless, the committee sees potential merit in the minister
having regard to considerations such as the cost of living for low-income
households, and in particular the cost of housing for those households, when
setting the payment to income ratio. The government should also consider
whether differential ratios should apply based on a debtor's ability to cover
costs of living at a reasonable standard.
Restriction on voting
4.20
The committee notes that all bar one submitter supported the restriction
on a proposed administrator, or a related entity of a proposed administrator,
from voting on a debt agreement proposal. The committee agrees that a conflict
of interest exists in allowing a proposed administrator, or its related entity,
from voting on a debt agreement proposal, which it intends to administer.
Consequently, the committee is of the view that it is appropriate and timely
for this conflict of interest to be addressed, and supports the amendment.
4.21
On balance, the committee is of the view that the amendments proposed in
the BADAR bill will increase confidence in debt agreement administrators,
minimise the practice of unscrupulous administrators, and help protect
vulnerable debtors, while also ensuring that the debt agreement regime is
accessible and equitable. The committee recommends that the BADAR bill be
passed.
Recommendation 3
4.22
The committee recommends that the government consider amending the BADAR
bill to allow for debt agreements implemented under a three year cap to be
capable of being extended by up to an additional two years by agreement of the
debtor, creditors, and debt agreement administrator.
Recommendation 4
4.23
The committee recommends that the government consider including
provision in the BADAR bill to require the minister to have regard to the cost
of living for low-income households, the average cost of housing, and potential
CPR increases, when setting the payment to income ratio, and whether
differential payment to income ratios based on a debtor's ability to cover
costs of living at a reasonable standard could be appropriate.
Recommendation 5
4.24
Subject to recommendations 3 and 4, the committee recommends that the
BADAR bill be passed.
Senator the Hon Ian Macdonald
Chair
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