Attorney-General’s Roundtable on Personal Insolvency

A summary of priority issues discussed at the Attorney-General’s personal insolvency law reform roundtable held on 2 March 2023 has been released by the Attorney-General’s Department: Ministerial Roundtable on Personal Insolvency: summary

There were five rather particular issues discussed with a range of other issues following.  All were useful through none went to the fundamentals of bankruptcy law reform. 

1 and 2. Increasing the bankruptcy threshold value from $10,000, and increasing the period of time for compliance

The summary reports that there was general consensus that the bankruptcy notice and petition thresholds should be lifted, ranging from $20,000 to $50,000. 

A question might be raised as to the extent to which bankruptcy notices, and petitions, are used by creditors as debt recovery mechanisms which would, perhaps properly, be more restricted if the threshold were raised.  Although difficult to substantiate, the fact that around 2,700 bankruptcy notices were issued in 2021-2022 but only 552 sequestration orders were made, suggests, perhaps, that many notices were issued to try to recover a judgement debt.  The further discussion about bankruptcy notices focused only on whether the current 21-day compliance period was sufficient, or whether say 60 days may be more appropriate. 

In making criticisms of and recommendations about the sequestration process, the 1988 Harmer Report said that then only 20% of notices issued went on to found sequestration orders.  The real issue it raised was whether there should be bankruptcy notices in their current form at all, along with what it termed the ‘ancient’ act of bankruptcy. Harmer referred to the bankruptcy notice and petition procedure as being “unduly antiquated, time-consuming and costly” and it saw the need “for a modern, simplified, less time-consuming and less expensive process”.

As for the concept of relation back, which relies on the concept of the act of bankruptcy, the Harmer Report recommended it be abolished as a “fictitious, artificial and abstract concept … rarely understood”: [697]. None of these modernising recommendations were ever implemented.

3. Options for a shorter discharge period from bankruptcy for some bankrupts

The prospect of a one-year period of bankruptcy was first announced in 2015.  The summary reports that the roundtable continued to debate it.  One concern noted was that a 1-year bankruptcy may not allow sufficient time for trustees to administer complex estates or deal with non-compliant bankrupts; although liquidators seem to have no difficulty in investigating director misconduct without the comparable ‘hold’ that bankruptcy provides. 

Also discussed was a simpler process for quick ‘no asset’ bankruptcies, perhaps modelled on New Zealand’s No Asset Procedure under Part 5 of its Insolvency Act 2006.

4. Options for easier annulment for inappropriate bankruptcies

There was concern that the annulment process through the court, based on some error or mistake in the bankruptcy or sequestration process, should be improved.  There are already broad grounds to seek an annulment, under s 153B, but bankrupts rarely meet the criteria.  For example, going bankrupt ‘by mistake’ on poor advice is not a sufficient ground.  While many such annulments are sought from the Court, very few are granted – only 1 in 2021-2022 and only 4 the year before.

Annulments on a s 73 composition (84) and on full payment of debts under s 153A (250) are far more frequent.

Whether a bankruptcy might be annulled because the debts leading to the bankruptcy were the result of financial abuse, as raised in the summary, is problematic. 

The summary also notes that the amount of trustee remuneration can be significant pending an annulment application; guidance to trustees in such cases would be useful.  Of particular significance are the legal complications following the setting aside of a sequestration order by the Federal Court, including the position of the trustee’s fees for having administered the bankruptcy: see Bechara v Bates [2021] FCAFC 34; Robson v Body Corporate for Sanderling at Kings Beach CTS 2942 [2021] FCAFC 143.

5. Untrustworthy advisors

These and their regulation continue to be under discussion, including by the current Parliamentary Joint Committee (PJC) inquiry into corporate insolvency.  Offences do exist under the Bankruptcy Act, along with accessorial liability under the criminal code, but the need for more focused law, and enforcement, was discussed. 

Other issues

The summary then lists further particular issues which were raised.  Several of these that cross over into corporate insolvency have also come up in the hearings and submissions before the PJC inquiry.  These include whether the difficulties for small businesses that have both corporate and personal assets and liabilities are such that a small business specific insolvency regime is required, whether there should be increased harmonisation across the corporate and personal insolvency systems, and whether there is a need for a general modernisation of and review of the whole insolvency system.

These items are likely to be the subject of comment by the PJC; it has raised the impact of insolvency on small business and whether there is need for a single insolvency law.  It has also raised fundamental questions about the purposes of insolvency. 

Perspective and realities

Some basic data from AFSA puts personal insolvency and its performance and reform in context. 

Personal insolvency numbers have been declining for some years although AFSA has made an economic prediction of their imminent increase. The 9,545 new insolvencies recorded in the 2021-22 financial year were down 10% from 2020-21 and are at their lowest level since 1995–96. They represent only a tiny proportion of the population, although with a wider spread of numbers through creditors, and with a wider social and economic impact beyond the law.

AFSA data shows that the average dividend paid to creditors in 2021-2022 was 2.23c/$. While that is minimal, registered trustees administered nearly $268 million in payments in 2021–22 with secured creditor payments accounting for 21%, trustee fees another 28% and dividends paid were around 20% ($52m).  Most people who entered personal insolvency during 2021-22 had low levels of debt, with 52.7% of insolvencies involving less than $50,000 in liabilities and just over a quarter had debts of over $100,000.

The main achievement of bankruptcy, which it does well, is to discharge the liabilities of the insolvent.  Redistributing the remaining assets of the bankrupt and providing some level of accountability follow. 

As to creditors, while the law pays much attention to informing and involving them, any substantial dividend returns are a rarity.  The law’s focus on creditors, and in corporate insolvency, might need to be reviewed.  Other purposes of insolvency law might also be assessed in light of the commercial realities.

Those realities include the inherent aspect of limited funds, and the social and economic purposes supported by bankruptcy, such that the respective roles and resources of government and the private sector also needs to be assessed.   

A general modernisation and simplification of the Bankruptcy Act, including as recommended by Harmer, and in the context of a comprehensive review of the whole insolvency system and its agreed purposes would be useful.  How that sits in the order of competing government priorities is another matter.

Note: I was pleased to have been invited to and to have attended this roundtable.


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