Revised Explanatory Memorandum
(Circulated by authority of the Attorney-General, the Honourable Philip Ruddock MP)Schedules 2, 3, 4, 5, 6 and 7
Schedule 2 - Amendments relating to compositions and schemes of arrangement
125 Division 6 of Part IV of the Act provides a mechanism for bankrupts to propose a composition or scheme of arrangement for dealing with their debts. If the creditors accept the bankrupt's proposal, the bankruptcy is annulled.
126 Many of the concerns which will be addressed by the proposed amendments to Part X (contained in Schedule 1 of this Bill) also arise in relation to post-bankruptcy compositions and arrangements. Therefore, it is proposed to make some amendments to the provisions of Division 6 of Part IV to address these concerns.
127 Items 1, 2 and 3 are consequential amendments necessary because of the amendment proposed by Item 8 which will provide for compositions or schemes to be 'set aside' or 'terminated' rather than 'annulled'.
128 Item 4 proposes to insert new subsection 73(1A) which will require the trustee, within two working days after receiving the bankrupt's proposal, to give a copy of that proposal to the Official Receiver. This requirement does not currently exist. As a result, ITSA does not receive notice of these proposals and the Inspector-General is not always able to exercise his regulatory functions. The notification requirement will put the Inspector-General on notice that a proposal has been made which will allow the Inspector-General to decide whether there are matters to investigate or whether to attend the creditors' meeting to ensure creditors are fully informed before making their decision. Item 11 is an application provision relating to this amendment and provides that the new subsection 73(1A) will apply to proposals lodged with trustees after this Item commences (which will be a date fixed by Proclamation). The notification requirement will not apply to proposals given to trustees before commencement of these amendments.
129 Item 5 proposes to insert new subsection 73(2AA) which will require the trustee's report to creditors on the bankrupt's proposal to name each creditor who was identified on the bankrupt's statement of affairs as a related entity. It is not intended to restrict the rights of related creditors to vote or receive dividends under the composition or scheme of arrangement. However, it is important that all creditors are aware of any relationships which may influence the voting outcome.
130 Item 6 proposes to insert new section 73B which will require the proposed trustee of the composition or scheme of arrangement to make a written declaration stating whether the bankrupt is a related entity of the proposed trustee and whether the bankrupt is a related entity of a related entity of the proposed trustee. The proposed trustee will be required to give a copy of this declaration to the Official Receiver and the trustee of the bankrupt's estate. The trustee of the bankrupt's estate will be required to give a copy of the declaration to all creditors at the same time as the report on the bankrupt's proposal required under subsection 73(2). These changes are intended to address the risk that the proposed trustee may not act impartially and creditors may believe they are not fully informed about the bankrupt's affairs and proposal. It is important that all creditors are aware of any relationships which may influence the voting outcome. This requirement will apply only where the proposed trustee of the composition or scheme is someone other than the trustee of the bankrupt's estate.
131 Item 6 also proposes the introduction of a new section 73C which will require the bankrupt's statement of affairs and the proposed trustee's declaration of interests under subsection 73B(2) to be tabled at the creditors' meeting. The proposed new section also requires the bankrupt to table a written statement at the meeting identifying any material changes to the information contained in his or her statement of affairs since it was provided. There will be a similar requirement for the proposed trustee to table a written statement about any material changes in relation to his or her declaration of relationships with the bankrupt.
132 Item 7 proposes to repeal subsections 75(4), (5), (6), (7) and (8). These provisions deal with annulment of a scheme or composition. These provisions are no longer necessary because Item 8 proposes to insert a new section 76B dealing with setting aside and termination of a composition of scheme of arrangement. The proposed new section will incorporate into Division 6 of Part IV the new sections 222 to 222D, 224 and 224A proposed in the amendments to Part X contained in this Bill. This will mean that the process for setting aside or terminating a post-bankruptcy composition or scheme of arrangement will mirror those applying to personal insolvency agreements.
133 Items 9 and 10 propose amendments to paragraph 109(1)(c) and subsection 114(1) to omit the word 'annulled'. These amendments are consequential to the amendments proposed by Item 8 which will mean that a composition or scheme will no longer be annulled - instead, they will be 'set aside' or 'terminated'.
134 Item 12 is a transitional provision applying to the amendments contained in this Schedule. The amendments made by this Schedule do not apply to a composition or scheme of arrangement which was annulled before the commencement of this Item, or to an application made under subsection 75(4) for an annulment of a composition or scheme of arrangement, or to proceedings in relation to that application which had not been finally determined. The existing Act and regulations will continue to apply to those matters.
135 Item 13 provides for the application of the amendments made by items 5 and 6 that concern the new disclosure requirements of the bankrupt's related entities and the trustee's declaration of relationships. If a copy of the trustee's report on the proposal was sent to a creditor before the commencement of this Item, the new disclosure requirements will not apply. Schedule 2 will commence on a day to be fixed by Proclamation.
Schedule 3 - Amendments relating to performance standards
136 Section 155H of the Act deals with involuntary termination of a trustee's registration and sets out the grounds on which the Inspector-General may consider terminating such registration. Item 1 proposes to add, as an additional ground, failure by the trustee to comply with a prescribed standard. This refers to the minimum standards of performance expected of trustees and makes it clear that the Inspector-General is able to consider performance standards, as well as the duties and obligations of a trustee, in making decisions about a trustee's suitability for continued registration. Item 2 proposes to amend subsection 155H(4) to include a reference to the new ground in the list of matters to be considered by a committee formed for the purposes of section 155H.
137 Item 3 proposes to insert new subsection 155(5) which will provide that the regulations may prescribe standards applicable to the exercise of powers, or the carrying out of duties, of registered trustees. The standards to be included in such regulations will be developed in consultation with the Insolvency Practitioners' Association of Australia. The standards should also be reviewed regularly to ensure they adapt to emerging issues for practitioners. It is desirable to include these standards in the regulations so that they can be more easily updated.
138 These amendments will apply to registered trustees generally. The standards will also include expectations of controlling trustees. Therefore, a failure to comply with the standards when acting as a controlling trustee would be a matter for a committee to consider in relation to that practitioner's status as a registered trustee.
139 The regulations currently provide the grounds upon which a solicitor becomes ineligible to act as a controlling trustee. The proposed amendments to section 155H will not affect solicitors. However, equivalent amendments will be made to the regulations to ensure the same standards apply to all controlling trustees.
Schedule 4 - Amendments relating to voting documents
140 Section 263C of the Act creates an offence where a creditor knowingly or recklessly gives the trustee a statement under section 64D that is false or misleading in a material particular. A statement under section 64D concerns the creditor's entitlement to vote.
141 Section 64E allows a creditor to appoint a proxy to vote on behalf of the creditor at the meeting.
142 The amendments proposed in this Schedule are intended to expand the scope of the offence to include false or misleading statement given in both the section 64D statement and the proxy under section 64E.
143 Item 1 proposes to omit, from subsection 263C(1), the words 'section 64D statement knowing or reckless that the statement' and replacing them with the words 'voting document knowing or reckless that the document'.
144 Item 2 proposes to repeal the definition of 'section 64D statement' in subsection 263C(2). Item 3 proposes to insert a new definition of 'voting document' in subsection 263C(2) which encompasses both the section 64D statement and a proxy form as described in section 64E. The amendments will apply to voting documents given to the trustee for the purposes of all meetings called under the Act (that is, under Part IV, IX, X or XI).
Schedule 5 - Amendments relating to notice of meetings
145 Section 64A of the Act outlines the requirements applying to notices of creditors' meetings. Subsection 64A(2) requires these notices to be in writing and delivered by post, document exchange or facsimile. These very specific requirements arguably prevent other forms of delivery such as email. Many creditors, particularly large financial institutions, would prefer to receive notices electronically. The requirements in subsection 64A(2) are also inconsistent with other provisions of the Act which allow for service of documents in a manner specified by the regulations - this provides more flexibility by allowing the regulations to change as new technology emerges and different ways of delivering documents become available.
146 The amendments proposed by Items 1 and 2 will facilitate delivery of notices of meetings by email. Item 1 proposes an amendment to paragraph 64A(1)(b) so that, where the trustee is aware of an email address for a creditor, the trustee will be obliged to give that creditor notice of the meeting. Item 2 proposes to insert new subsection 64A(2) which will provide that notice of a meeting must be given in a manner specified in the regulations. Regulation 16.01 of the Bankruptcy Regulations provides that, unless the contrary intention appears, service of documents can be provided by any of the specified methods including those set out in subsection 64A(2) and by email. Paragraph 64A(2)(c) as currently drafted evinces a contrary intention to regulation 16.01 which means it is not currently possible to serve these notices by email. This is inconsistent with other provisions of the Act which do not prevent service by email. There is no reason why any of the methods specified in regulation 16.01 would not serve as sufficient notice of meetings.
147 Item 3 is an application provision which will provide that the amendments to section 64A apply where, after commencement of these amendments, a person tells the trustee, or the trustee otherwise becomes aware, that the person is a creditor of the bankrupt.
Schedule 6 - Minor and technical amendments
148 The amendments proposed in the Schedule are minor amendments which have been identified in the ongoing review of the operation of the Act. Those amendments are technical in nature, do not affect the underlying policy of the Act and will enhance its operation.
149 Currently subparagraph 41(3)(c)(i) operates to prohibit the issue of bankruptcy notices which are based on judgments more than 6 years old but only where they are made by a Court exercising bankruptcy jurisdiction. State and Territory Court judgments which are more than 6 years old are not caught by that provision and bankruptcy notices have been issued on the basis of those judgments. Item 1 proposes to correct this anomaly and provide that any judgment order more than 6 years old may not be relied on in presenting a bankruptcy notice. Item 4(1) is an application provision which will mean that this amendment applies to a bankruptcy notice issued after commencement of the amendment.
150 At the start of a contribution period, a bankrupt is assessed for income contributions. Subsection 139W(2) provides for adjustment of the assessment at each contribution period based on a number of factors including changes in the number of dependants. The words 'wholly or partly dependent on the bankrupt for economic support' describe the word 'dependants' in paragraph 139W(2)(c). That description is redundant because the definition of 'dependant' at section 139K, inserted by amendments in 2002, already includes those words. Item 2 proposes that those words, and related redundant words, should be omitted from paragraph 139W(2)(c).
151 Item 3 proposes to repeal subsection 267E(2) and insert a new subsection 267E(2) which will provide that the Registrar may issue a warrant for the arrest of a bankrupt who fails to attend before the Official Receiver or authorised person. Subsection 267E(1) provides for the Registrar to issue a warrant for arrest of a person who fails to attend before the Official Receiver or authorised person who is provided with a power to obtain information and evidence under section 77C. However, under subsection 267E(2) the Registrar must not issue such a warrant unless he or she is satisfied that the person was offered an advance of allowances and expenses in respect of attendance, in accordance with subsection 77E(1). By virtue of subsection 77D(2), a bankrupt is not entitled to such an advance in respect of an attendance relating to her or his bankruptcy. It is proposed to extend the Registrar's power of arrest to the bankrupt as it is often the bankrupt who does not appear, notwithstanding that the bankrupt is not entitled to an advance. Item 4(2) is an application provision which will mean that this amendment applies to a warrant issued after commencement of the amendment.
Schedule 7 - Amendment of the Bankruptcy Legislation Amendment Act 2002
152 The amendments proposed in this Schedule will make an amendment to the Bankruptcy Legislation Amendment Act 2002 (the BLAA) necessary to correct a drafting error in the transitional provisions in that Act.
153 Section 2 of the BLAA explains when the Act commences. It provides that sections 1 to 3 of the Act commence on the day on which the Act receives Royal Assent. It further provides that the provisions of Schedule 1 (which contains the substantial amendments to the Bankruptcy Act 1966) commence on a single day to be fixed by Proclamation. That day was fixed as 5 May 2003.
154 The transitional provisions were intended to explain how the amendments made by the BLAA apply, particularly in relation to bankruptcies for which the date of bankruptcy was prior to commencement of the amendments. These provisions rely on the two concepts found in Item 198 of Schedule 1:
- commencing date means the date on which section 1 commenced
- commencing time means the time when section 1 commenced
155 Section 1 commenced on the day on which the Act received Royal Assent which was 18 December 2002.
156 Insolvency practitioners have been operating on the basis that the amendments commenced on 5 May 2003 and that they generally apply to conduct or events which occurred after that date.
157 The transitional provisions frequently explain how the amendments commence by reference to whether the date of bankruptcy was after the commencing date or the commencing time. It is now clear that both the commencing date and the commencing time are 18 December 2002 (that is, the date of Royal Assent).
158 For example, item 206, which deals in part with the application of the amendments which repealed early discharge from bankruptcy, state that the amendment applies "...to bankruptcies for which the date of the bankruptcy is after the commencing date."
159 Trustees have been operating on the basis that this amendment applies to bankruptcies for which the date of bankruptcy is after 5 May 2003. However, it is now apparent that it applies to bankruptcies for which the date of bankruptcy is after 18 December 2003. This is certainly not what was intended in drafting these amendments. It was intended that the amendments should generally apply only to bankruptcies for which the date of bankruptcy was after the commencement of the actual amendment. This is significant because trustees could already be receiving early discharge applications from people who became bankrupt after 18 December 2002 when they may not, in fact, be entitled to be discharged.
160 The same problem arises in relation to all of the transitional provisions which refer to the commencing date and the commencing time.
161 The amendments proposed by Items 1 and 2 would replace the reference to section 1 with a reference to Schedule 1 in the definitions of commencing day and commencing time in Item 198 of Schedule 1 of the BLAA. Item 3 is a validation provision intended to protect any action taken which was based on the assumption that the amendments actually commenced on and applied from 5 May 2003.