Bankruptcy has been the subject of many discussions over the past few years. Back in 2017, the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 was formulated with the intention of promoting and fostering entrepreneurial activity by decreasing the stigma and harsh penalty associated with the current three-year bankruptcy regime. It was asserted that by keeping a debtor bankrupt for 3 years, the aspirations of budding entrepreneurs were being thwarted.
It appears that the main objective of the Bill aligns with the Innovation Agenda, which encourages Australians to take reasonable educated risks, leave behind the fear of failure and be more innovative and ambitious.
It is understood that the concept had its genesis in a World Bank report which lamented that there was a critical lack of entrepreneurs, which was stifling the world economy.
The Bill lapsed when the election was called in 2019. Then with the onset of the COVID19 pandemic, it was envisaged that there would be a dramatic increase in the number of businesses failing with the consequential increase in the number of debtors becoming bankrupts. So, in January 2021, the Attorney-General’s Department released a discussion paper regarding possible changes to the Bankruptcy Act including the one-year bankruptcy and invited submissions.
Numerous submissions were lodged including one from ASIC which supported the Bill in principle but subject to the caveat that the three-year period of disqualification of bankrupt directors under s 206F of the Corporations Act would continue, notwithstanding that the debtor had been discharged from bankruptcy after 12 months.
Various credit providers submitted that, as the majority of objections to discharge lodged by trustees, which extended the period of bankruptcy to 8 years, were lodged to encourage above-average income earning bankrupts to pay their outstanding income contributions; these bankrupts could be relieved of their liability. Also, it was submitted some bankrupts would “sit on the beach” for 12 months and once discharged, would obtain or return to, employment with an above-average income, thus avoiding the income contribution regime.
Why did it happen?
The Bill contained a provision that the former bankrupt was required during the subsequent 2-year period, to inform their trustee when their after-tax income exceeded the threshold amount for income contributions. However, this provision is considered by many observers to be impractical as it would be expensive and difficult to oversight by trustees.
Also, it was submitted by credit providers, that the introduction of the 12-month bankruptcy regime would significantly reduce the number of debtors entering into Debt Agreements which have been very successful in providing an increased return to unsecured creditors.
Older readers will recall that in 1992, the 6-month bankruptcy was introduced but was subsequently repealed in 2003 after the legislators received numerous submissions from creditor groups that “bankruptcy is too easy”. It was also found that the Official Trustee’s budget had significantly increased by the additional human resources required to introduce and oversee the new provisions, with no additional benefit to creditors.
There is a strong possibility that if one-year bankruptcy comes into being, it may suffer the same fate as its predecessor.
What is being said?
One observer commented that the concept of the one-year bankruptcy “may all sound quite fantastic, and have budding entrepreneurs propel their previously suppressed innovations careening into the spotlight without any fear of the harshness of a three-year bankruptcy forever shrouding their potential for greatness, however, questions remain over whether it will have the desired effect.”
The statistics provided by AFSA disclose that the major causes of bankruptcies are as a result of consumer debt caused by excessive use of credit or the sudden absence of income or both, rather than carrying on a business. There was no mention of a debtor becoming bankrupt because their entrepreneurial business innovation failed.
Furthermore, the predicted “tsunami of bankruptcies” has not eventuated with AFSA reporting the opposite in that, in the March quarter 2022, personal insolvencies fell 13.0% compared to the March quarter 2021, and that business related bankruptcies had fallen from 30.8% in the 2021 March quarter to 29.9% in the 2022 March quarter.
So, it will be interesting to see whether the proposed Bill survives and if it does, to observe whether it brings forth all those thwarted budding entrepreneurs but at the same time, balances the interests of both debtors and creditors as well as the other stakeholders.
dVT Group is a business advisory firm that specialises in business strategy, turnaround, forensic investigations, and insolvency (both corporate and personal).