The wider context of the proposed one-year period of bankruptcy

Many less than 1% of bankrupts warrant an objection to discharge from their bankruptcy, trustees leave it til the last moment to lodge objections, and creditors generally get back on average $100 for their unpaid debt. What is this issue all about? Is there a wider context?

The proposed reduction in the period of bankruptcy from three years to one is being considered by the Senate’s Legal and Constitutional Affairs Legislation Committee, which is due to report by 19 March 2018.

Here are some facts and figures that may help to put this issue, and bankruptcy itself, in context.

  • Trustees lodged only 519 objections to discharge in 2016-2017 in relation to the 57,923 persons who were in bankruptcy, a factor of .009%.
  • Registered trustees tend to lodge their objections in the last 3 months of a bankruptcy; the Official Trustee is more likely to lodge its objections within the first year of a bankruptcy.
  • While income contributions represent about 20% of total receipts of the Official Trustee, and about 12% for registered trustees, much of those moneys would go (in my estimate) to the remuneration of the Official Trustee and of the registered trustees, not to the creditors. The remuneration is for the work involved in administering a bankruptcy for three years, and beyond.
  • Dividend returns to creditors are less than 1% for estates administered by the Official Trustee, and less than 4% for registered trustee estates. That is, for a $5000 creditor, its dividends would be $50 and $200 respectively.

Is this proposal such a big deal?

Perhaps we need to see bankruptcy in a broader context, that of national personal and household debt.  In his introduction to Personal Insolvency in the 21st Century, Professor Iain Ramsay writes (my paraphrasing):

  • that recessions triggered by large increases in household debt can result in slower economic recovery than those triggered by other events;
  • that swift and effective insolvency procedures during a recession to reduce the household debt overhang could therefore have a valuable macro-economic effect by restoring consumer demand in the economy;
  • that bankruptcy discharge itself:
  1. reduces lost productivity and costs to families and communities;
  2. creates incentives for responsible lending and accounting practices, and allocating the risk of losses to those in the best position to spread those risks;
  • that the EU sees personal insolvency law as part of the development of an integrated credit and capital market.
  • and that in the early part of this the twenty-first century, personal insolvency law had become a significant market institution and ground rule of credit markets.

So perhaps the Australian government’s sole focus on the promotion of entrepreneurialism is too narrow, though it also has a wider relevance. The Departments of Employment and Industry have said:

“Countries that excel in innovation tend to exhibit a high degree of entrepreneurship in both the research community and industry. This is partly a function of market drivers, and cultural and historical factors. However, regulatory settings and access to finance can support or hinder entrepreneurial activity. Countries such as the US, the UK and Sweden have more supportive environments for start-ups and entrepreneurial risk-taking, including taxation arrangements for employee share schemes, bankruptcy laws that do not disproportionately penalise business failure, initiatives to improve access to funding, and clearly-defined Intellectual Property rights regimes coupled with pro-competition policies, to incentivise firms’ uptake of knowledge-based capital”: Boosting the commercial returns from research, citations omitted.

It is a pity that other disciplines have not had their say on what at the moment is largely a legal focus on the proposed reform. But that is an issue in insolvency generally.

Photo: Elm, University of British Columbia campus.

 

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4 comments

  1. Objections to discharge are supposed to be the last resort if you look at the legislation. Objecting to discharge early often creates bitterness and even less cooperation than before, especially with the entrepreneur types who simply want to get out there and have another crack. Just look at the Terry Donald Hill line of cases where I was involved. As to dividends, there is at least one trustee who pays dividends in at least one in three bankruptcies – but that is becoming harder by the day with increased regulation. I also don’t understand the logic in suggesting that early discharge creates incentives for responsible lending. Logically it seems to me to be the opposite as you put the bankrupt back on the lending market sooner and hence increase the risk of default over the economy as a whole. If you follow the banking royal commission, the topical issue is the slack lending practices of banks, especially when dealing through brokers. Malcolm Turnbull as a former merchant banker has a skewed view of the world. There is to my mind a disconnect between what is being said in the banking royal commission and shortening the term of bankruptcy. You want to reduce irresponsible lending and easing the consequences is not the way to go.

  2. From a pre-insolvency practitioners point of view a one year bankruptcy makes sense. I agree with all that is said above. There are a small percentage of shonks, and they will always be shonks and dishonest throughout their bankruptcy and beyond.
    Bring it on.

  3. Thought provoking as usual!

    There are some variables here…Mix of simple/complex bankruptcies? Do they lodge objections in relation to the same types of issues & in the same circumstances? If you think that private trustees handle more of the complex bankruptcies, then it’s not surprising that their investigations are more complex and take longer, and that objections are filed later….but all speculation in the absence of data.

    • Yes, that information from AFSA is only the tip but it is something, and under the proposed new law, registered trustees may have to adjust to giving earlier consideration to whether an objection is warranted.

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