With the federal government yet to respond to the PJC Report on corporate insolvency of July 2023, which recommended a general review of both personal and corporate insolvency law, it has nevertheless proceeded to announce personal insolvency reforms and proposals. This may be because the changes involved are fairly routine, and the proposal is consumer specific. Nevertheless, there are many connections between personal and corporate insolvency recognised by the PJC that ultimately justify a review of both, including their poor financial outcomes for creditors.
These personal insolvency reforms are said to come from the ‘roundtable’ of stakeholders chaired by the Attorney-General in March 2023. [1]
The minor changes
First up, the changes are these –
- to increase the monetary threshold for involuntary bankruptcies from $10,000 to $20,000, as indexed;
- to increase the timeframe during which a debtor may respond to a bankruptcy notice from 21 days to 28 days;
- to reduce the period a discharged bankruptcy is publicly recorded on the National Personal Insolvency Index (NPII) to seven years following the 3 year minimum discharge period, that is, at least 10 years in all; and
- to remove the proposal, or acceptance, of a debt agreement as an act of bankruptcy.
It is boldly said that these changes will “ensure a fairer outcome for debtors” and reduce the “stigma” of bankruptcy.
Whereas, among all the reforms that might have been made, these are quite limited.
Involuntary bankruptcies, ordered by the court, comprise under 10% of all bankruptcies. How many creditors’ petitions are presented between $10,000 and $20,000 we are not told. The $20,000 threshold may be more aimed at limiting the use of bankruptcy notices, and petitions, as debt recovery demands. The reform may serve some purpose.
Allowing a debtor an extra 7 days to respond to a bankruptcy notice is quite timid if not derisory.
Keeping a bankruptcy on the NPII for at least 10 years hardly seems to be a reform and equates with the same time period for spent criminal convictions.
And the extent to which acts of bankruptcy come from a debt agreement must be minimal, noting also that acts of bankruptcy including keeping house and departing from one’s dwelling were recommended for repeal by the 1988 Harmer Report.
Minimal Asset Procedure
The paper explains that roundtable participants identified a shorter discharge from bankruptcy as a “long-term” reform priority. Maybe “very long-term” given a one-year bankruptcy was first proposed in 2015.
As an alternative solution, a procedure modelled on New Zealand’s No Asset Procedure is proposed.
It is said that a
“Minimal Asset Procedure would clear a person’s debts and allow access to a fresh start sooner than a bankruptcy, where that person has no other way to pay. Importantly, it should also leave creditors no worse off – meaning Australia’s personal insolvency system remains fair and balanced”.
The discussion paper [2] asks for submissions by 29 July 2024.
New Zealand
The New Zealand model provides an alternative personal insolvency option that allows a person with debts of between NZ$1,000 (New Zealand’s bankruptcy threshold) and NZ$50,000 and who holds no realisable assets to be cleared of their debts. The No Asset Procedure is less restrictive than bankruptcy and usually lasts for one year. A person is only able to enter into the Procedure once.[3]
The paper refers to other international models which are intended to achieve similar purposes. These include the Debt Relief Order in England and Wales, the Minimal Asset Process in Scotland and the Debt Relief Notice in Ireland. These processes are compared in the discussion paper.
The proposal
The paper lists the following to be potential elements of a Minimal Asset Procedure in Australia:
- there be a maximum debt threshold of $50,000 to enter the procedure;
- it would last for 12 months, with a period of 4 years post-discharge to be listed on the National Personal Insolvency Index;
- a maximum threshold for income would be determined for eligibility for entry;
- and a maximum threshold of $10,000 in assets with exceptions for tools of trade and a vehicle to be eligible for entry;
- a debtor may only enter into the Procedure once, and
- the Procedure should be less onerous than a bankruptcy.
It would need to fit within the existing 4 personal insolvency options of temporary debt protection, debt agreements, personal insolvency agreements, and bankruptcy.
That there is a “certain portion of bankruptcies which do not provide returns to creditors as there are no available assets for realisation”, as the discussion paper says, is well known.
AFSA 2022-2023 statistics show that around 85% of bankruptcies produce no dividends to creditors. Average dividend payments are 2.19c/$.
The paper, relying upon only 2021-2022 figures, identifies its group or “cohort” as being the 26.8% of personal insolvencies that had less than $50,000 in liabilities and less than $10,000 in assets. These would come from the current consumer environment of non-traditional forms of credit such as buy-now-pay-later options leading to an increasing number of debtors who are in financial distress.
“Bankruptcy is often a disproportionate option to the debtor’s circumstances. While other insolvency options may exist, these require an ability to repay some debts”.
In other words, bankruptcy is hardly relevant to that group; larger issues of housing, jobs and security prevail. Anecdotally, those bankruptcies would be closed soon after opening, although nominally kept open for the statutory 3 year period.
Bankruptcy continues for others
Referring to the “potentially life-long consequences” of bankruptcy, the paper says the focus of the reform is therefore not on bankruptcy itself, which would remain unchanged, but on measures that seek to ensure that bankruptcy is seen as and used only as an option of last resort.
That is, beyond this limited group of consumer debtors, bankruptcy would continue to have potentially life-long consequences, beyond the minimum 3 year period of bankruptcy. In particular, small business operators remain unassisted, despite earlier proposals for reform. According to the ASBFEO, around 60% of small businesses operate as individuals or partnerships, and nearly 50% of small business loans are secured by personal assets.
The discussion paper asks a series of detailed questions for those interested to respond, by 29 July 2024.
The 2023 PJC Report
The PJC recognised the relevance of personal insolvency to much of its corporate insolvency inquiry.
Hence, recommendations 1 and 2 and 3 are that there be a comprehensive review of Australia’s insolvency laws, encompassing both corporate and personal insolvency, and of their appropriate principles and objectives, and of options to enhance public interest objectives and the effectiveness of, and interaction between, the personal and corporate insolvency systems.
While 4 and 5 recommend ASIC gather and disseminate relevant data, these are likewise on-going tasks of AFSA.
And just as rec 6 calls for an examination of the system of corporate insolvency pathways from a holistic systems analysis perspective, comparable systems analyses would be required of those pathways in bankruptcy, a point raised in the discussion paper as to how the Minimal Asset Procedure would fit in the existing personal insolvency processes. Indeed, the simpler pathways in personal insolvency, and more limited court involvement, and other attributes, should be a model for reforms in corporate.
Part 5.3B small business restructuring (rec 8) reform could be an opportunity for all debts of a small business to be compromised, representing perhaps the biggest area of potential coordination required between personal and corporate insolvency. Part 5.3B specifically excludes liabilities under guarantees.
Recommendation 12, as to the gender imbalance among liquidators, should draw upon the experience in bankruptcy, where AFSA’s policy is to give 20% of estates to female trustees.[4]
Recommendation 13, as to the remuneration of liquidators, should draw upon comparable data in personal insolvency, where one survey showed over 30% of estates paid no remuneration to registered trustees.
Independence requirements (rec 14) often impact mixed personal and corporate appointments; and concerns about pre-insolvency advisers (rec 15) are common to both.
Funding recommendations (15, 16, 17) would need to consider whether a government liquidator (reg 17), comparable with the Official Trustee, as originally intended, is required. In fact the PJC reported on the significant proportion of assetless companies in liquidation, and limited dividend returns, which are comparable with those in bankruptcy.
That is:
- the estimated value of assets in 50% of insolvent companies is less than $10,000;
- estimated liabilities are under $100,000 in 40%;
- 90% produce no dividend to unsecured creditors: see PJC Report Ch 2.
Practitioners’ offence reporting obligations and their cost are as much issues in personal insolvency as in corporate (rec 19).
Recommendations concerning the ATO (21, 22) and its proposed model creditor guidelines apply in particular in personal insolvency given the personal tax liabilities for company debts that can be imposed.
Recommendation 27 as to corporate unfair preferences and voidable transactions would benefit from personal insolvency input, and its recovery processes under s 139ZQ.
Recommendation 28, as to corporate trustees, might usefully be extended to question the protection from bankruptcy given by trusts.
In the end
In the end, these proposed personal insolvency reforms might be useful and responses should be given but the reforms are not of such significance that they would intrude on what may yet be a comprehensive review of both personal and corporate insolvency law.
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[1] Which I was pleased to attend. Ministerial Roundtable on Personal Insolvency: summary | Attorney-General’s Department (ag.gov.au)
[2] Minimal Asset Procedure discussion paper, July 2024
[3] See Trish Keeper, New Zealand’s No Asset Procedure: A Fresh Start at no Cost? (2014) 14(3) QUT Law Review.
[4] Changes to AFSA’s approach to transferring matters, July 2021
