Further changes to Australian’s insolvency system are under consideration, including a proposal to reduce the bankruptcy period.
The Attorney-General’s Department has released an options paper detailing possible changes. The options paper has been put together following consultation on the issue last year.
The government has tried to change the bankruptcy period (which is currently three years) before. It introduced a bill in 2017, which lapsed when the 2019 election was called.
Its current proposal is that the default period for bankruptcy be reduced to one year. There would be some exclusions, including anyone who has been bankrupt in the previous 10 years, anyone banned as a director and anyone convicted of offences related to fraud or offences under the Bankruptcy Act.
The government is keen to promote debt agreements as an alternative to bankruptcy but its previous efforts have not been effective.
Changes were introduced in 2018 to raise the level of professionalism among administrators and weed out dodgy practitioners. But since then there has been a decline in the number of new debt agreements.
To address this decline the government is proposing to extend the default term limit for debt agreements to five years. Its view is that a defined term would give creditors confidence that an agreement would be sustainable and provide a commercial return.
It is also proposing to change the debt and income thresholds for debt agreements to make the system accessible to a wider range of debtors.
The government is also proposing to tighten up on the policing of untrustworthy insolvency advisers. Bankrupts and registered trustees would be required to disclose the details of advisers who provided pre-insolvency advice.
“These requirements will assist in detecting whether the bankrupt has received pre-insolvency advice aimed a defeating the legitimate interests of creditors,” the options paper says.
The government is also proposing to make it an offence under the Bankruptcy Act to advise, instruct, assist or counsel any person to commit or attempt to commit existing offences such as concealment of property and making a false declaration.
Over the past couple of years the government has made a number of changes to the insolvency system – some of them as part of its COVID relief package.
Last July, the minimum amount at which creditors can issue a statutory demand to a company for a debt owed increased from A$2000 to $4000.
The minimum of debt that can trigger bankruptcy was increased from $5000 to $20,000 in 2020 as a temporary measure but was then cut to $10,000 as a permanent change at the beginning of last year.
Also in January last year, a new formal debt restructuring process was introduced for small business (with liabilities of less than $1 million). Designed to reduce the complexity and cost of company administration and enable directors to remain in control of their businesses, the new process involves a small business restructuring practitioner consulting in an advisory role to assist the directors to develop and appropriate debt restructuring plan.
This change removes insolvent trading restrictions while a business is restructuring and replaces the requirement for directors of