Release of draft Bankruptcy Amendment (Debt Agreement Reform) Bill 2018

The debt agreements regime under the Bankruptcy Act would be substantially changed in order to give greater confidence in a system which saw an increase of 17.5% in debtors availing themselves of the regime in the September quarter 2017, compared with a paltry 0.1% increase in bankruptcies. Debt agreements in that quarter are the highest on record at 3,885. This was the ninth consecutive quarter in which debt agreements have increased in year-on-year terms. In 2016-2017, there were 13,597 debt agreements, and 16,320 bankruptcies.

The Bill would double the debt agreement assets threshold to $222,000, restrict debt agreements to no more than 3 years, ensure a debtor’s capacity to pay according to their income, and require debt agreement administrators to be interviewed as part of a new registration process, and insured.  New standards of conduct are proposed, and administrators will, like trustees, be required to refer evidence of offences to AFSA. Issues of expenses, referrers and cash incentives are dealt with in the Bill.

According to the draft Explanatory Memorandum (EM), the

commercial debt agreement administrator industry now performs a significant financial advising function, including in relation to people in financially vulnerable circumstances. Consequently, debtors, creditors and the public should have reason to place trust and confidence in the debt agreement system”.

The Bill

The details of this Bill have now been released, as an exposure draft rather than as a Bill before parliament. The Bill was not reached for introduction into parliament at the end of 2017 and is now expected to be introduced next month. The Senate’s Legal and Constitutional Affairs Legislation Committee is to report on the Bill by 19 March 2018 and submissions are invited by 16 February 2018.

As with the proposed one year bankruptcy, it is proposed that the majority of amendments in the Bill will commence six months after Royal Assent. This will give debt agreement administrators and AFSA time to prepare for the commencement of the reforms.

Some particular items in the Bill are:

Asset threshold doubled – The asset value threshold for a debtor entering a debt agreement is currently $111,675.20.

As the EM explains, “due to the recent rises in Australian property prices, particularly in capital and major cities, the current threshold amount prevents a significant proportion of Australians from accessing the debt agreement system. Item 17 therefore doubles the threshold amount to ensure a greater proportion of debtors have access to the debt agreement system”, that is, to over $222,000.

Contributions compared to income – new paragraph 185C(4)(e) would provide that a debtor cannot give the Official Receiver a debt agreement proposal if the total payments under agreement exceed the debtor’s income by a certain percentage. The Attorney can determine this percentage by legislative instrument under new subsection 185C(4B).

Undue hardship – new subsection 185E(2AB), which provides that the Official Receiver can refuse to accept a debt agreement proposal for processing if the Official Receiver reasonably believes that complying with the debt agreement would cause undue hardship to the debtor.

Expenses – new subsection 185C(3B) which provides that a debt agreement proposal must detail the types of expenses the debt agreement administrator can recover. This requirement ensures that creditors and debtors have an opportunity to assess the reasonableness of an administrator’s practices in relation to expenses.

Referrers – new paragraphs 185C(2D)(f) and 185C(2D)(g), which require the proposed administrator to record details of any broker or referrer information, and declare whether an affected creditor is also a related entity, in the certificate required by subsection 185C(2D).

Cash incentives – under current law, a creditor could circumvent the requirement for debts to rank equally by requesting cash incentives from the proposed administrator in exchange for its acceptance of the debt agreement proposal. Therefore, new subsection 185EC(6) would introduce an offence for a proposed administrator who gives, agrees, or offers to give an affected creditor an incentive for voting a certain way on a debt agreement proposal.

Duty to refer offences – amends section 185LA to extend the duties of a debt agreement administrator to reflect those conferred on trustees under paragraphs 19(1)(h) and (i) of the Bankruptcy Act. This will improve the integrity of the debt agreement regime and ensure that misconduct is dealt with promptly by the appropriate law enforcement authorities.

Annual return deadline – amends subsection 185LEA(1) so that the applicable deadline for annual return submission is 25 business days after the financial year. This ensures consistency between the deadlines for trustee and debt agreement administrator annual returns and assists AFSA to perform its regulatory functions.

Insurance – the absence of a requirement to hold insurance is problematic because large amounts of money flow through the debt agreement system and the larger administrators deal with considerably larger inflows of money than an average registered trustee.

There would be new provisions that require debt agreement administrators to obtain adequate and appropriate professional indemnity and fidelity insurance, similar to the requirements set out in paragraph 20-20(4)(b) of the Bankruptcy Act, in order to have their applications for registration and renewal of registration approved by the Official Receiver.

Interview of applicants for registration – new subsection (1A) into section 186C to require the Inspector-General to interview applicants for registration as debt agreement administrators as soon as practicable after receiving the application. This amendment will minimise delays in processing applications and provide the Inspector-General with sufficient flexibility to adjust timeframes to reflect the varying levels of complexity that each application presents. This amendment aligns with a similar obligation for the assessment of trustee registrations.

Fit and proper – the Inspector-General may refuse to approve an application for registration if the individual is not a fit and proper person.

More soon.

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2 Responses

  1. I wonder if this is the equivalent of preinsolvency steps currently being brought in to the corporate area but regulated and focused on small estates which might otherwise have led to bankruptcy in days gone past. Could it also be the thin end of the wedge for the effectiveness of Part X or in more extreme cases after bankruptcy s 73 schemes.

    I also wonder whether this is a recognition of increased consumer debt in the community.

    If as appears to be the case debt agreements are finally being accepted as a means of debt structuring – then that is good. What is may also do in increase the number of applications tos et aside debt agreements with a view by creditors of putting additional pressure on debtors to do better.

    There are of course advantages to debt agreements as has been shown but not publicly promoted.

    If the outcome of better credit responsibility both on the debtor and the creditor side then that is good.

  2. 1. will debt administrator’s be required to upgrade their educational requirements to obtain a ticket or with the one year bankruptcy, will there be a downgrading of educational requirements.

    2. Is there any evidence of how the one year bankruptcy will affect the numbers of people going bankrupt each year. Do you know the UK’s experience?

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