Some concession for small business bankruptcy under severe NSW law

NSW law can remove a person’s right to practice their job for up to 6 years, in the person has gone bankrupt, well beyond what is the present 3 year period of bankruptcy. A real estate agent had his licence cancelled until 2024 by the Commissioner of Fair Trading, in relation to the agent’s 2018 bankruptcy which was annulled by full payment out of his debts in 2019.

Bankruptcy has traditionally had an impact on those who need a licence to conduct their business, which includes most professions and trades.  It may depend on whether the profession or trade involves the handling of money, although that is not always determinative.

More recent approaches have given some concession such that even if a person goes bankrupt, their licence will not be cancelled if they can show that the bankruptcy was not their “fault”.

The real estate agent – Mr Gilder – succeeded in showing that his bankruptcy did not result him in being what was termed a “disqualified person” under the Property, Stock and Business Agents Act 2002.  He was able to show that he “took all reasonable steps to avoid the bankruptcy” as the Act required.

The intended purpose of such a disqualification provision is to ensure that people who have demonstrated an inability to adequately manage their business, and who may put their financial needs before those on whose behalf they act, should be excluded from holding a licence. But of course that is not always a reason for a person’s bankruptcy.

Gilder’s financial difficulties began around 2012 but he did not seek any financial advice at this time, “hoping things would eventually work out”. He did eventually seek advice in 2018 by which time bankruptcy was inevitable.

Taking all reasonable steps to avoid bankruptcy is consistent with being financially responsible.

Those words have been the subject of analysis in earlier decisions cited, including that the person is “not required to take all possible steps to avoid bankruptcy, but rather all reasonable steps to do so”.  This brings into consideration at what point was the person aware or should have been aware that bankruptcy was a possibility? And what would have been the view of a reasonable person having that knowledge and experience? The focus is also on the steps that the person took to avoid the bankruptcy in question, not the bankruptcy at large.

Although Gilder delayed seeking advice, the Tribunal took into account his actions in continuing to communicate with his creditors, making payments as he was able and seeking advice from a solicitor and debt adviser, even if late, in May 2018; by then there were no further reasonable steps he could have taken to avoid the bankruptcy. He could have taken that step sooner than he did, but in the circumstances, it is as likely that earlier advice would simply have led to him petitioning earlier than he did for bankruptcy.

It should be noted also that he was able to have his bankruptcy annulled by borrowing moneys from his present employer.

Gilder v Commissioner of Fair Trading [2019] NSWCATOD 80

Law reform and policy

The NSW law in question here operates for some period of time, after discharge from bankruptcy. The section refers to a person who is “an undischarged bankrupt, or at any time in the last 3 years was an undischarged bankrupt …”.

This is inimical to the “fresh start” offered by bankruptcy in particular in the case of someone from the SME sector. It also is predicated on the assumption that bankruptcy has involved financial misconduct.

At least with the expected reduction in the period of bankruptcy to one year, under Commonwealth law, this period of restriction imposed by NSW law, and by other states, will likewise be reduced.

The policy issues involved in these types of laws are discussed by Nicola Howell and Professor Rosalind Mason in “Reinforcing Stigma or Delivering a Fresh Start: Bankruptcy and Future Engagement in the Workforce” (2015) 38(4) UNSW Law Journal 1529.

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