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. 

Objections to a bankrupt’s 3 year discharge in Australia – mixed messages and unfair law

Apart from Australian law imposing a long period for a person to be subject to the restrictions and stigma of bankruptcy, of 3 years, it allows trustees to extend that period of time, up to 8 years, and based on some rather mixed messages and perhaps unfair law.

Objections to discharge

A trustee may lodge an objection to a bankrupt’s discharge based upon any of 22 separate grounds – s 149D.  Several of those – for example that “any transfer is void against the trustee because of s 121” (which allows prior transactions going back indefinitely to be challenged) – involve the bankrupt’s conduct often well prior to bankruptcy.  Others involve conduct during the bankruptcy – an example given by AFSA is an objection based on the bankrupt’s failure to advise the trustee of her new telephone number, thereby extending the period of her bankruptcy to 5 years, say from 2021 to 2026.[1]

Initially, the law required trustees to justify lodging an objection by giving their reasons for doing so, important in the context that discharge was an important right, hence the power to object was correspondingly significant.[2]

But in 2002, the law was changed to dispense with stated reasons, despite the need to give reasons for decisions being fundamental in many areas, and one would think so when a period of bankruptcy is being extended.

No reasons

As the legislature explained, the courts were in fact finding that trustees could not properly explain their reasons for objecting.  “Some trustees have found it difficult to differentiate clearly the ground(s) of an objection and the reason for filing the objection.” In one case the trustee’s expressed “reasons” for objecting were simply that the  “amount has not been paid”, which, as the court said, merely restated the ground of objection.[3]

And the legislature’s dispensing with reasons applied to objections that extended a bankruptcy to the full 8 years, creating a series of 12 “special grounds” of objection, the idea being to make it

“easier for trustees to lodge objections … and harder for bankrupts to sustain challenges”.

In the most ‘recent’ published AFSA statistics, 2018-2019, most objections were ‘no reasons given’ objections– 1,382 – extending the bankruptcy to eight years, with only 37 objections extending to 5 years.

Later compliance

The legislature then also included a provision that no account was to the taken of the conduct of a bankrupt after the ground first existed: s 149N(1B).  A voidable transaction ground might have occurred 6 years earlier.  Even if there were conduct of the bankrupt that could remedy that, it cannot be relevant in the bankrupt’s favour.

This change was to address the government’s other concern that

“ … on occasions, the [Administrative Appeals Tribunal, AAT] has upheld a bankrupt’s challenge to an objection simply because, either during an AAT hearing or just before it occurs, the bankrupt eventually has provided information long sought by the trustee and the non-supply of which information was the ground of the trustee’s objection. Such decisions undermine a prime purpose of the objection regime which is to induce a bankrupt to cooperate, promptly, with the trustee of the bankrupt estate”.[4]

The Current regime

What seems a rather mixed set of other messages include that a trustee must lodge an objection if this will prompt the bankrupt to comply and there is no other way of doing so – s 149B; but lodging an objection as a form of punishment is not a valid purpose and is not permitted.[5]

The right of review to the Inspector-General is limited, as to “special grounds”, who need only confirm the ground is valid and there is sufficient evidence in support, for which no reasonable excuse is given – s 149N(1A). The AAT is confined to the same process.

That statute law does not quite make sense on policy grounds, though it is at least qualified by the courts, with mere punishment not being permitted. One rationale could be that a person contemplating bankruptcy might be deterred from failing to disclose an asset, for example, if they knew of the potential consequences – that is, general deterrence, which hardly seems valid.

These are some cases illustrating how the current law works.

Objections based on conduct prior to bankruptcy

Mr Swampillai had failed to include a certain liability in his statement of affairs when he went bankrupt in 2013.  In 2021, while still a bankrupt, the AAT upheld the trustee’s objection based on that ground.[6]

Mr Saad was able to have his objection removed, based on the same ground, given that he suffered from profound deafness, a speech impediment and learning difficulties, such that there was found to be no evidence in support of the objection.[7]

Later compliance by a bankrupt will not assist

This particular issue was raised before the AAT in the decision in Playford, whose objection was based on past conduct which he could not then remedy.  Playford argued that there was no future utility in the objection when “according to his submission, had nothing more to give”.  He argued that the objection constituted a punishment which was inconsistent with parliament’s intention and the case law. Playford claimed that the trustee’s power of objection is one of last resort, to be used sparingly and according to s 149B.  The AAT found his submissions “argumentative” and upheld the objection.  That simply involved the AAT assessing whether there was evidence supporting a special ground for which Playford had no excuse: s 149N(1A).

In a case like that, that outcome then begs the question as to what would prompt the trustee to withdraw the objection?

AFSA IGPS 14

It also seems to go against guidance of AFSA.  In the context of offence referrals,[8] IGPS 14 suggests that trustees respond to a bankrupt’s non-compliance by filing an objection to discharge which “may influence the bankrupt to comply in the knowledge that the objection to discharge will be withdrawn when compliance is achieved”. It goes on to say that an “objection to discharge must be withdrawn when compliance has been achieved directly related to that matter”.

 The right of administrative review is narrow

The AAT saying that Playford’s submission was argumentative perhaps indicates that bankrupts might be better to bring the matter before a Court, which has a wider discretion to look at considered arguments; or before the Inspector-General.  For one thing, trustees should still have a good reason for lodging an objection, even if they need not disclose it. The idea of a trustee acting for no reason need only be stated to understand that.

The court: That is where a court has a broader authority.  A bankrupt can apply direct to the Court to seek any orders in relation to the administration of the estate, which would include to review an objection or the trustee’s conduct and reasons in lodging it.[9]

The Inspector-General: Then there is the Inspector-General who has supervisory oversight of trustees and is not bound by the narrow task under s 149N but may examine other reasons or motivations of the trustee. That might disclose that the objection was being maintained solely to allow continued income contributions to be demanded; or to bring some pressure to bear on the bankrupt or a relative to settle a court action; or because the trustee has just failed to locate what assets he or she incorrectly assumed were available, or there was simply delay in attending to the finalization of the estate.

Numbers doubled in a year: Finally, again reviewing those limited statistics, not only were there 1,382 ‘no reasons required’ objections in 2018-19, but these had more than doubled from the previous year, in 2016-17, when there were only 519.[10]  AFSA does not show what the numbers are since.

Comments welcome.

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[1] OTPS 5 Objections to discharge from bankruptcy Date last updated: 1 July 2021.

[2] Van Reesema v Official Trustee in Bankruptcy [1983] FCA 202.

[3] Re Hall [1994] FCA 1319

[4] Explanatory Memorandum to the Bankruptcy Bill 2002

[5] Inspector-General in Bankruptcy v Nelson

[6] Swampillai and Inspector-General in Bankruptcy [2021] AATA 1771

[7] Estate of Nicholas Saad and Inspector-General in Bankruptcy [2018] AATA 487

[8] Inspector-General Practice Statement 14, IGPS 14 – Referring offences against the Bankruptcy Act 1966 to the Inspector-General, 1 July 2021.

[9] See IPSB s 90-20, or the under the previous law, s 178 – Frost v Sheahan [2009] FCAFC 20.

[10] AFSA letter of 31 January 2018 to Senate Legal and Constitutional Affairs Legislation Committee.

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