Bankruptcy Law Reform update — balancing entrepreneurial spirit and creditors' rights

We would like to acknowledge the contribution of Corrine Penny to this article.

The last major overhaul of Australia’s Bankruptcy Regime was in 1988.  Given the changes in technology and way of doing business in the ensuing period, calls have become louder for further reform to better balance the rights of creditors and encouragement of entrepreneurship and to reduce the stigma associated with bankruptcy.  The Attorney-General this week announced a suite of measures aimed to achieve that goal.  A question remains whether the reforms go far enough. 

Key points

• Increased threshold for involuntary bankruptcies from $10,000 to $20,000, with the threshold to be indexed each year
• Increase in timeframe for response to a bankruptcy notice from 21 days to 28 days
• Debt agreements no longer to be considered ‘an act of bankruptcy’
• Reducing the period for which a discharged bankruptcy is recorded on the National Personal Insolvency Index to seven years
• No change to the current default period of bankruptcy of three (3) years but a shorter discharge period has been identified as a long-term reform priority.
• Attorney-General to commence consultation in relation to introduction of a Minimal Asset Procedure

Background

On 8 July 2024, the Attorney-General announced a series of proposed reforms to Australia’s bankruptcy laws with the intention of making Australia’s bankruptcy system fairer and more balanced.     

The announcement follows a national Roundtable convened by the Attorney-General on 2 March 2023, designed to provide opportunity for key stakeholders to engage in the development of personal insolvency law reform.

Minimal Asset Procedure consultation

In addition to announcing a raft of reforms to the current regime, the Attorney-General has commenced consultation on a Minimal Asset Procedure, which it is intended, “would clear a person’s debts and allow access to a fresh start sooner than a bankruptcy.”

The concept of a minimal asset procedure would be an alternative to bankruptcy, clearing debts when a person has no other way to pay and allowing “access to a fresh start” sooner than the bankruptcy route.

It is modelled off a similar process in New Zealand known as the No Asset Procedure, where low-income and low-asset debtors are allowed to have their debts discharged more quickly, which was also explored in the 2022 inquiry into corporate insolvency in Australia by the joint committee on corporations and financial services.

The Attorney-General has said that the procedure should leave creditors no worse off, Minimal Asset Procedure will include the following.

• Entry threshold restrictions which will include:
  • a maximum debt of $50,000
  • no more than $10,000 in assets with exceptions for tools of trade and a vehicle to be eligible, and
  • maximum income threshold to be determined.
• The Minimal Asset Procedure would last for 12 months, with a 4-year post-discharge listing on the National Personal Insolvency Index.
• A debtor may only enter into the procedure once in their lifetime.
• Designed to be less onerous than bankruptcy.  

Submissions for the consultation on a Minimal Asset Procedure in Australia close on 29 July 2024.

Reform measures at a glance

• Threshold for involuntary bankruptcies to be increased from $10,000 to $20,000, with the threshold to be indexed each year.
• Timeframe for response to a bankruptcy notice to be increased from 21 days to 28 days.
• Debt agreements no longer to be considered ‘an act of bankruptcy’ for the purposes of s 40(1) of the Bankruptcy Act
• Period for which a discharged bankruptcy is recorded on the National Personal Insolvency Index to be reduced to seven years.
• No change to the current default period of bankruptcy of three (3) years but a shorter discharge period has been identified as a long-term reform priority.

Will the measures work?

The Government now has to decide whether to implement the proposed reforms in whole or in part. 

In our view, the amendments are a middle ground.  They do not go as far as some had hoped and expected but they are step in the direction of reducing the stigma of and impact of bankruptcy with the intention of better allowing entrepreneurship to flourish.   The question is whether, in terms of the rights of creditors, the baby is being thrown out with the bathwater.   As always, it is a fine balance and whether the measures have the desired impact remains to be seen.