Australian personal insolvency reform for COVID-19 impacted debtors

The Australian government’s proposed retention of the restrictions of bankruptcy on COVID-19 impacted business proprietors and consumers is questionable, but expected.  Possible reasons for this range from a protective concern by the government not to allow these bankrupts too much free rein in light of the uncertain economic outlook for 2021, in case they become ‘serial bankrupts’, to concerns about ‘serious and organised crime’ taking advantage of a one year bankruptcy.  

In response to the impact of COVID-19 on micro to small to medium enterprises (MSMEs), the Australian government implemented insolvency reforms for a limited category of small businesses, being corporations with liabilities under $1m. The government is now proposing to deal with the majority of MSMEs, through limited reforms in personal insolvency, and to continue to impose default restrictions on bankrupt business proprietors for one year, until at least 2022. This would include those individual proprietors whose business failed because of the economic impact of COVID-19.  This compares with no comparable restrictions on directors of failed companies, for any period of time.

This does not appear to be the best way to meet ‘one of the principal goals of best practice standards in insolvency law’, according to the World Bank, to close off a person’s business failure by way of a ‘liberal discharge regime’ so as to allow and encourage their further enterprise. In fact such debtors

“are increasingly regarded not as fiends to be marked and restricted, but as casualties of the modern, volatile global economy, to be renewed and set back upon the road to productivity”.

In the context of COVID-19, the impact has not only been on persons in small business but on employees and consumers generally, who likewise will remain under restrictions.

The proposals are based on only four elements of the Australian Bankruptcy Act 1966: the 3 year default period of bankruptcy; Part IX debt agreements for low income, liability and asset insolvencies; Part X personal insolvency agreements, being alternatives to bankruptcy; and offence provisions, but only offences of persons who are bankrupt.

The government paper invites views on any other areas that address the impact of the coronavirus, including on sole trader and partnership businesses, but offers no thoughts on those.  See The bankruptcy system and the impacts of coronavirus.  Submissions close 12 February 2021.

2015 Background

The reason the government assumes a one-year period of bankruptcy might apply, rather than two, four or no years (bankruptcies reportedly finalised in two weeks don’t feature) is based on past thinking in the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 consistent with government policy announced in 2015.

Implementation of that 2015 reform announcement may be the peak, and the limit, of 2021 COVID-19 personal insolvency assistance proposed by the government.

MSME insolvency

What is needed, even if belatedly, is for personal insolvency reform to supplement the corporate reforms, such as they are – for one thing, they don’t cover the majority of MSMEs, most of which are individuals, and for another, they do not deal with personal liabilities arising from the corporate reforms.

Submissions to Treasury did raise the potential for personal liability to arise from corporate or sole trader failures. Financial Counselling said that its officers are increasingly supporting small business clients, referring to a poll of counsellors that business and personal debt is commonly and increasingly entwined, with 42% saying this was a common issue.

On a broader scale, the World Bank sees a need to have business liabilities dealt with together, noting the “porous” nature of the corporate veil.

“Even for entrepreneurs operating via limited liability legal entities, the liability shield is often porous, especially for MSMEs. Voluntary creditors often require individual entrepreneurs to bind themselves to their business entities’ contractual debts, usually via personal guarantees. Likewise for involuntary creditors (tort/delict/tax), doctrines for piercing through the liability shield expose individual entrepreneurs to liability for corporate obligations, and such doctrines are especially likely to apply in the case of closely held MSME entities”.[1]

The personal insolvency reforms have been released in a vacuum.


Then there is the undue focus on abuse of the system, rather out of proportion with more limited legal focus on corporate misconduct – or, as a US colleague put it,

“Australia’s pointless and anachronistic formalism, born of an 18th-century distrust of all debtors, seems to me to be the problem”.

For example, the proposals refer to ‘stakeholder’ concerns about “abuse by serial, non-compliant bankrupts to avoid debts”. While AFSA’s website refers to serial numbers, it makes no mention of serial bankrupts, its powers to deal with those under s 55(3AA) never reported as having been used.

However, the government will no doubt already have acted on the real concern expressed by the Australian Criminal Intelligence Commission (ACIC) that a reduction in the period of bankruptcy from three years to one “may increase the potential for serious and organised crime groups to exploit bankruptcy provisions for their own advantage”.[2]  The outcome of that  government action will inform this 2021 law reform process.

As to ‘pre-insolvency advisors’, and the vacuum they fill, there is no mention of the Senate committee recommendation for regulation in that area, beyond, as is typical, creating new offences.

Further comment, and on the process of Australian insolvency reform, is better left for later.[4]


[1] Saving Entrepreneurs, Saving Enterprises: Proposals on the Treatment of MSME Insolvency, World Bank, 2018.  See also UNCITRAL’s Draft text on a simplified insolvency regime – specific characteristics of MSEs and issues they face in financial distress, September 2020.

[2] Submission to Senate inquiry, 5 February 2018.

[3] Researching personal insolvency law and practice in Australia: An update and call for continued investment (2018) 26(3) Insolvency Law Journal pp 108-115, N Howell.

[4] Particularly in the context of the Thodey report’s descriptions of public sector silo mentality.

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