Whilst we conditionally support aspects of the Government’s proposal, we have recommended that the reforms are insufficient to protect the interests of creditors.
So what’s changing?
Under the National Innovation and Science Agenda, the Federal Government is proposing to reduce the term of bankruptcy from 3 years to 1 year. If the reforms occur, all bankrupts will be automatically discharged from bankruptcy after 1 year, unless the trustee objects to the discharge.
The Government’s reasons for this change include:
- to reduce the stigma associated with bankruptcy
- to encourage entrepreneurship and innovation.
Entrepreneurship vs protection of creditors
The proposed reforms will affect creditors. These effects include:
- an increased incentive for individuals to go bankrupt to avoid paying creditors
- a shorter period of time for a bankruptcy trustee to investigate a bankrupt’s affairs
- the risk that certain individuals will exploit the bankruptcy laws for improper purposes.
As insolvency practitioners in one of Australia’s leading middle market advisory practices, we are acutely aware of the need to strike the right balance between:
- protecting creditors; and
- promoting innovation in the economy.
Do the reforms strike the right balance?
In our view, the proposed reforms won’t strike the right balance between protecting creditors and promoting innovation and entrepreneurship in the economy.
Our primary concern is that the proposed reforms will automatically discharge all bankruptcies after 1 year, unless an objection is lodged.
Under the proposed reforms, bankrupts would be discharged after 12 months:
- despite being convicted of fraud prior to bankruptcy
- despite owing hundreds of millions of dollars to creditors (including the Australian Taxation Office)
- despite having declared bankruptcy on multiple prior occasions.
Those outcomes are unfair to creditors, are contrary to the intention of the proposed reforms and should not be allowed.
What’s our position?
Pitcher Partners provided a detailed submission to the Federal Government on the proposed law reform.
We proposed an alternative law reform that would achieve the Government’s proposed intentions, whilst adequately protecting creditors.
In our submission, we recommended that:
1. All bankruptcies should continue for 3 years
2. After 12 months, all ‘eligible’ bankrupts should be entitled to apply for early discharge
3. A bankrupt would not be eligible for early discharge if:
- The bankrupt was convicted of fraud prior to bankruptcy.
- Owed the Australian Taxation Office more than $1 million.
- Owed unsecured creditors more than $10 million.
- Was found to be involved in illegal phoenix activity.
- Had been previously bankrupt in the past 5 years.
4. The bankruptcy trustee could otherwise object to the early discharge on specified grounds
We also suggested that the grounds of objection be strengthened to ensure that a bankrupt would not be discharged if they failed to co-operate with their trustee and do everything the law requires of them during their bankruptcy.
You can access Pitcher Partners’ submission for your reference and information here.