A 1997 article about the need for data in insolvency law reform, rather than relying on assumptions and anecdotes unsupported by empirical research, remains as relevant today as then.
In a recent case, involving a 2017 bankruptcy discharged in 2020, the Federal Court found that the former bankrupt had received free legal services which constituted his “income” within the meaning of s 139L(1)(a)(v) of the Bankruptcy Act and upon which a valid income contribution assessment by the trustee had been made.[1] He was ordered to pay over $162,000, plus costs.
The issues were complex, the hearing commencing in 2022, proceeding over 9 days, with judgment reserved since June 2023. The trustee’s legal costs and remuneration would be considerable.
Former s 131
The idea of requiring a bankrupt to pay contributions from their income, and in particular non-cash income under s 139L(1)(a)(v), has some history.
Former s 131 of the Bankruptcy Act required a court to order a bankrupt to make contributions from her or his income. The section was regarded as ineffective and was replaced in 1991[2] by Division 4B of Part VI providing for assessment and collection of income contributions by the trustee subject to administrative review. There was seen to be a need to address the fact that “many bankrupts earn quite large incomes after bankruptcy” but have few if any divisible assets. “Income” was to include “non-cash benefits, such as free or low cost housing, motor vehicles, boats, and payment of expenses”.[3]
Hence s 139L.
The Bond bankruptcy and lifestyles of undiminished splendour
Early on there was a controversial decision in the controversial bankruptcy of the late Alan Bond,[4] the Full Federal Court rejecting a trustee’s income assessment based on Bond’s receipt of non-cash benefaction from family and friends. The majority judges held that in the absence of an employment relationship, a benefit received by a bankrupt could not be assessed as income, as a matter of statutory construction of s 139L. I wrote an article about this decision titled Lifestyles of undiminished splendour – bankrupts on fringe benefits,[5] the title coming from the dissenting judge who rather dramatically referred to the
“public mischief which has allowed some bankrupts to enjoy lifestyles of undiminished splendour while their creditors, large and small, are left lamenting”: [52].
The government agreed and the Ex Memo explaining the clarifying amendment to s 139L to its present form rather testily said that [95.2]
“the value of any benefit, whether or not provided in an employment context, whether or not in connection with the provision of work or services, and regardless of who supplies the benefit or the circumstances in which the benefit is supplied will be counted as part of a bankrupt’s income”.
The emotive words of the dissenting Judge were in the context of government and community reaction to the decision, Mr Ron Harmer writing that the changes to s 139L had
“every mark of a hurried ‘political’ reaction to media views about a very few bankrupt persons”.[6]
In light of Bertram, there appears to be no doubt about the wide effect of the current section 139L.
Law reform
Without commenting on that decision, the controversy concerning s 139L was seen by some at the time as representing a fundamental issue about personal insolvency law reform. It was the subject of a 1997 law reform article[7] by Keith Bennetts, his comments remaining pertinent today. Keith Bennetts – bankruptcy reform – lifestyles splendour
Bennetts refers to the divergent values which different sectors of the community, including the political sector, hold towards the objectives of a personal insolvency system. He says that the broad scope of s 139L supported those who saw the primary objective of bankruptcy as maximising returns to creditors; comparing that to the views of others who saw such a provision as reflecting a “lynching party mentality”, an overreaction to the “Gucci bankrupts”, resulting in discouragement of bankrupt support from family or friends. Further, it is
“not a primary function of the bankruptcy system to provide a debt collection process; rather the primary objectives should be to administer the debtor’s estate, to defray loss in an·orderly manner, and to provide the debtor with a fresh start”.
This leads to Bennetts’ main point, still very relevant today, that objective and empirical data is required in order to support efficient and effective insolvency law reform. This is as opposed to reform based on “unsystematic data, such as bureaucratic value-judgments, anecdotal data or information based on expert opinion”, pursued by bureaucrats with their “whiteboards”, referring perhaps to s 139L.
Echoing Harmer, he refers to outraged public and judicial opinion leading to costly and inconvenient reforms designed to redress behaviour only rarely encountered.
Today, he might also refer to the “stakeholder concern about potential abuse and repeat bankrupts” in relation to a one year period of bankruptcy, even to the extent that it may increase the potential for organised crime to (somehow) exploit bankruptcy law for its own advantage: see Predicting repeat consumer bankruptcy: A survival analysis of business-related repeat filings in Australia 2007–2021, Robinson, Smith, Wicht, Rice, McCosker, & McBride (2024) 33(2) International Insolvency Review 159 at fn 36.
Section 139ZQ
Bennetts gives another example, of s 139ZQ, which was introduced in 1992 to provide an administrative means for effecting voidable transaction recoveries, given what was said to be the high cost of such litigation. It was legally controversial. Bennetts queried whether data was gathered to support this justification. He asked
- over a reasonable period of years, how many bankrupt estates revealed instances of trustee recoveries being frustrated for the sole reason of lack of funds?
- how many of these, if recovery had been effected, would have resulted in a better return to creditors?
- how many instances in which lack of funds was a factor also involved other grounds which would have influenced the trustee’s decision to abandon the recovery?
The 2023 PJC Report
The same points were made recently in relation to preference claims, in the 2023 PJC Report on Corporate Insolvency, given submissions that they provided only limited returns to creditors. The PJC referred to the need for data on the value of preferences, the legal and practitioner costs of recovery and the benefits accrued to ordinary unsecured creditors (if any): [6.45].
As to s 139ZQ, Bennetts’ point was that for such a highly innovative provision embodying a new policy direction, the justifications being offered for it demanded a satisfactory level of empirical verification. However, at the time of its introduction, no collected data supporting the need for the section were offered with the result, he suggested, that the provision was not accompanied by any meaningful debate in which the published reasons for its introduction were able to be scrutinised and verified.
Income contributions
Adopting his reasoning, we might be more assured of the validity of income contributions or their purpose, if they resulted in dividends to creditors. As much as we know from AFSA’s published data is that income contributions constituted about $30m in receipts for registered trustees, out of $290m in 2022-2023, in 2,445 bankruptcies.[8] To what extent they contributed to maximising returns to creditors, we don’t know. We do know that around 85% of bankruptcies produced no dividends to creditors in 2022-23 and that dividend payments averaged 2.68c/$, leaving most creditors ‘lamenting’.
Reform
Relating this to 2024, the PJC has said we need data to better inform ourselves as to how the system operates. Importantly, we need to [re] settle the aims of insolvency, for example, whether the primary function of the bankruptcy system is to provide returns to creditors, or otherwise. Insolvency obviously doesn’t in most cases, either because of limited or no assets, or high costs of administration, or costs of litigation. Instead of the legal, industry and political fiction that moneys go to creditors, maybe we should just say they go in order of the statutory priority, in which unsecured creditors come somewhat down the list.
It depends on what data can be produced, and what purposes of insolvency are settled, to allow any comprehensive review of insolvency to proceed.
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[1] Bertram v Naudi (No 2) [2024] FCA 1239
[2] See Bankruptcy Amendment Act 1991
[3] Explanatory Memorandum to the Bankruptcy Amendment Bill 1991.
[4] Bond v Trustee of Property of Bond (a bankrupt) [1994] FCA 1411; (1994) 52 FCR 304.
[5] I offered my article to a government journal but it was declined, as stating a position contrary to government policy. It was published by the then IPA, the late Terry Taylor as editor (1994) 6(4) Australian Insolvency Bulletin 6.
[6] Flawed Bankruptcy Law, Australian Financial Review, 3 November 1994 at 20.
[7] Bankruptcy Reform: The Significance of Systematic Data and Consultative Processes in Developing Our Bankruptcy Law (1997) Flinders Journal of Law Reform 199, Keith Bennetts.
[8] Administration statistics 2022-2023.
