Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Australian root and branch bankruptcy reform – creditors’ rights? Elizabeth (Ist) laws? SMEs? …

While COVID-19 restrictions on creditors in bankruptcy have ended, though now with an increased $10,000 threshold, the experience should prompt one of many root and branch (R&B) issues that exist in Australian insolvency law. Those who call for such a review should be prepared to actually do so, unconstrained by self-interest and what can be hundreds of years of law and practice.

Rights of creditors

An issue raised in the government’s ‘threshold’ review was whether a single creditor should be able to initiate bankruptcy proceedings against a debtor at all, for whatever amount.  It is a given in Australian thinking, but it has been questioned as being inconsistent with the modern goals of bankruptcy unless the creditors collectively serve to benefit.[1]  With bankruptcy dividend returns averaging 2c/$ that benefit must be rare.

And as to practice, the debates about the threshold being raised reveal the reliance that creditors place on bankruptcy as a debt recovery mechanism. This reliance is supported by the courts, which have long accepted that creditors should be able to simply withdraw their petition on payment by a debtor, without inquiry whether the payment might be preferential.  The courts once regarded such conduct as akin to extortion.[2]

So while court ordered bankruptcies account for under 10% of the total, some heat would be generated by what would be seen as further incursions upon creditors’ ‘rights’ to pursue debt recovery.

While any idea that creditors found good alternatives to using notices and petitions to recover their debts under the 2020 COVID-19 restrictions might be fanciful, good policy should prevail.

But there are other R&B recommendations in a report that has been out for three decades now that should be considered.

Harmer Report recommendations

The 1988 Harmer Report recommended abolition of the concept of relation back, along with bankruptcy notices and acts of bankruptcy.

Relation back

The Report described relation back (which is dependent on the notion of the act of bankruptcy) as “fictitious, artificial and abstract concept … rarely understood”. It had earlier been described as a “useless doctrine” even before our 1924 Bankruptcy Act was debated.

But Australian conservatism decided to retain what is an Elizabethan (the First) doctrine notwithstanding this recommendation, and notwithstanding that it was long ago abolished in the United Kingdom and New Zealand.

Bankruptcy notices and acts of bankruptcy

The Report also raised the problem of the “unnecessarily complicated” form of bankruptcy notice, subject to “excessive technical dispute”, not resolved by the form’s latest 2021 “simplified and user-friendly structure”.[3]

And remember that acts of bankruptcy focus on “some act of public notoriety” which represents “a relic from the past where debt carried social stigma and public approbation”.[4]

One/no year bankruptcy

Then there is the R&B issue of imposing a one-year period of bankruptcy restrictions, instead of three; and of having comparable automatic restrictions imposed on recalcitrant directors or insolvent companies.

The work involved in any R&B review

Some may agree that Australian insolvency reform lags in relation to individuals, including those in business, despite progress in thinking elsewhere, including through the World Bank[5] and UNCITRAL,[6] and locally, Australian academia.[7]  That progress seems to have gone unnoticed or ignored.

Given the need for Australian insolvency law and practice to catch up to the 21st century, any serious R&B inquiry would and should be more extensive than some might think.

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[1] Involuntary bankruptcy as debt collection: multijurisdictional lessons in choosing the right tool for the job, Kilborn & Walters, (2013) 87 Am Bankr LJ 123.

[2] Re A Debtor (1929-31) 2 ABC 164

[3] See AFSA’s 2019–20 Personal Insolvency Compliance Report.

[4] Perspectives on Australian Bankruptcy Law through the Prism of the World Bank Report on the Treatment of the Insolvency of Natural Persons, Mason and O’Mahony (2014) 14(3) QUT Law Review 3.

[5] 2013 and 2017 reports

[6] 2020-2021 Working Group V reports

[7] For example, Keay’s Insolvency, 10th ed 2018; also footnote 4.

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