Bankruptcy – for a whole year?!

“The degree of civilization in a society can be judged by entering its prisons.”[1]

I would not go so far as to say that some reactions to the government’s proposed reduction in the 3 year period of penal servitude for bankruptcy to 1 year is an indicator of the degree of Australian civilisation.

But it does support a view of Australia here and internationally that, as one person put it, we have not yet got over our convict heritage, and we suffer from our insular geography.

Why any period of time at all?

To provoke that Australian sentiment more, why does bankruptcy involve any period of time at all?

The idea of “serving a term” of 3 years, or even one, as proposed, is generally applicable to those jailed, or those whose licence is suspended, or those being required to serve a period of providing community service. It usually follows a court or administrative act in response to a finding of misconduct or crime.

Bankruptcy is properly described as penal, it involves a period of time and “penal servitude” is an apt phrase.

Bankruptcy is not a crime nor a civil offence nor anything lesser.  The circumstances behind it might be but not often. It was criminal long ago and prisons and worse punishments were the consequence.

A question

Could not a person could go through a public declaration of bankruptcy, be obliged to hand over their assets, to have a trustee make inquiries and examine past transactions, without a period of servitude following? As to enforcement, if necessary, many a difficult debtor can be subject to garnishees, examinations and other process without the need for a legal classification.

Consequences of bankruptcy compared

The consequences of bankruptcy are not good for creditors but neither are many other consequences that are suffered by others because of perpetrators’ legal defaults. Compare the respective outcomes for other perpetrators, as against bankrupts:

  • a sole director company in business is liquidated owing creditors $1m with no assets. There was no breach of the law. As a director of a failed company, there is no or limited legal consequence for the director. Creditors lose out.
  • an individual in business goes bankrupt owing $100,000 with some assets. There was no breach of the law. As a bankrupt, the person loses their home, other assets, pays income contributions and is under scrutiny for 3 years. Creditors also lose out.
  • a person has a $10 million judgment made against them but does not go bankrupt.  It is in no-one’s interest to do so. There need be no legal consequence for the debtor. That creditor loses out.
  • a company is fined $8 million for serious breaches of the Australian Consumer Law but the company goes into liquidation and the fine is not payable;
  • A work experience boy is injured by the negligence of the employer.  The company is fined $240,000 and it goes into liquidation with no money payable.

Looking at the penal servitude imposed on a bankrupt as result of being unable to pay a $10,000 or even a $100,000 debt, does not compare with the more limited or no consequences for legal defaulters in other parts of the law.

What do creditors get anyway?

And as to bankruptcy’s beneficial outcomes for creditors, after 3 years or more?

On average, creditors receive much less than 5c in the dollar.

Back to reality

In any event, readers will be relieved that this idea is not proposed at all.

All that is being put by the government is to reduce a bankrupt’s period of penal servitude to one year, in common with many other comparable societies.

It will be interesting to see the progress of the Bill and any debates in and out of parliament.

[1] Fyodor Dostoevsky, The House of the Dead. And name of the painting please?

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3 Responses

  1. You know MM, why have any “servitude period” at all. Let the Skase’s, the Bond’s, the Elliot’s, the Robert Maxwell’s of this world ….?

    1. Garry, bad cases don’t make good law for all. There needs to be attention given to moral hazard, as in all such law.

  2. I’d like to add the potential for accessorial liability, particularly for statutory breaches like the ACL, environmental liability, WHS etc. It is possible to go after company directors where are either knowingly involved in many (but not all) contraventions or where they themselves also engaged in the conduct (eg a director who makes misleading statements can be sued under ACL s18 as well as the company).

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