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House of Representatives

Bankruptcy Legislation Amendment Bill 2002

Explanatory Memorandum

(Circulated by authority of the Attorney-General, the Honourable Daryl Williams AM QC MP)

Readers' Guide
This Explanatory Memorandum is divided into three main sections: a general outline of the main provisions of the Bankruptcy Legislation Amendment Bill 2002 (the Bill) (Section 1); a discussion of the main policy objectives underlying each of the provisions (Section 2, commencing at page 7); and a detailed discussion of each provision, item by item (Section 3, commencing at page 11).

Section 1 - General outline & financial impact statement

General outline

2 The Bankruptcy Legislation Amendment Bill 2002 (the Bill) will make a number of significant changes to bankruptcy law. The changes address concerns that the bankruptcy system is biased toward the debtor and that debtors are not encouraged to think seriously about the decision to declare themselves bankrupt. The changes also address unfairness and anomalies, particularly in relation to the operation of the early discharge arrangements and the lack of effective sanctions on uncooperative bankrupts. Finally, the changes will streamline the administration of bankruptcies by trustees.

3 The objects of this Bill are to:

give Official Receivers a discretion to reject a debtor's petition where it appears that, within a reasonable time, the debtor could pay all the debts listed in the debtor's statement of affairs and that the debtor's petition is an abuse of the bankruptcy system;
abolish early discharge from bankruptcy;
strengthen the objection-to-discharge provisions of the Bankruptcy Act 1966 (the Act) by making it easier for trustees to lodge objections to a person's discharge from bankruptcy and harder for bankrupts to sustain challenges to objections;
make clear that a bankruptcy can be annulled by the Court whether or not the bankrupt was insolvent when a debtor's petition for bankruptcy was accepted; and
raise by 50% the current income threshold for debt agreements, to allow and encourage many more debtors to choose this particular alternative to bankruptcy.

4 Other changes proposed by the Bill are consequential on the above measures, streamline the operation of the Act or are a consequence of the Insolvency and Trustee Service of Australia (ITSA) having become an executive agency. The changes include those to:

allow the Inspector-General to enquire into the activities of debt agreement administrators and of solicitors who are controlling trustees;
give the court a power, in specified circumstances, to effect the discharge of a bankrupt, despite the bankrupt's failure to meet the formal requirements for filing a statement of affairs;
make the filing of a debtor's petition an act of bankruptcy;
allow the amounts of final judgments or final orders obtained by a creditor to be amalgamated for the purpose of meeting the $2,000 threshold for the issue of a bankruptcy notice;
require an Official Receiver to reject debtors' petitions of debtors who do not have the same connection with Australia as is required in relation to creditors' petitions;
amend several machinery provisions about creditors' meetings to:

require trustees, when convening a meeting, to consider the convenience of creditors;
clarify the quorum provisions that apply to creditors' meetings;
require trustees to provide to initial creditors' meetings an estimate of the trustee's total remuneration and of its impact on dividends (if any) to creditors;
clarify the voting rights of a secured creditor by correcting an unintended consequence of the wording of a 1996 amendment of the Act; and
allow holders of proxies lodged at a meeting to vote on subsequent motions at that meeting, including at any adjourned part of that meeting;

introduce a streamlined meeting procedure to allow creditors to meet and vote by post, and also to resolve proposals for variations of section 73 compositions and schemes of arrangement by a similar means, if no creditor objects to this procedure;
allow a trustee to refuse to call a section 73 meeting unless adequate provision has been made for trustee fees that have been approved but are unpaid, and for the costs of, and trustee remuneration regarding, the meeting;
require bankrupts to notify trustees of material changes to matters relevant to a trustee's administration of a bankrupt's estate;
provide that a debtor is liable for new debts incurred during his or her cooling-off period, even when bankruptcy follows at the end of that period;
make clear that priority amounts due to a bankrupt's employees for unpaid wages extend to unpaid superannuation, and that Medicare levy constitutes income tax for contribution scheme purposes;
allow the Court to deny, to those debtors who file frivolous counter-claims, set-offs or cross demands as defences to a bankruptcy notice, the benefit of the subsection 41(7) extension of time for compliance with the notice;
allow creditors, by special resolution, to permit a bankrupt to retain sentimental property of a prescribed kind;
require trustees to realise assets in a bankrupt estate within a 6 year period after discharge but allow trustees to extend that time, in appropriate circumstances, on giving written notice to the bankrupt;
alter the contributions scheme provisions to:

remove the 'zero income' test of whether a person is a bankrupt's dependant and allow an eligible person to earn up to an amount prescribed by the regulations and still qualify as a dependant;
clarify which income tax refunds are assets that vest in the trustee and which are income for contributions scheme purposes;
allow trustees, rather than an Official Receiver, to determine a higher income threshold in the income contribution scheme if the bankrupt is in circumstances of undue hardship;
require trustees to notify contributors of their rights to have a trustee's assessment decisions reviewed; and
introduce a standard 60 day limit for most applications for a review of a trustee's decisions, including those on contributions assessments and the filing of objections;

ensure that a bankruptcy cannot be annulled on full payment of the debts unless interest on the interest-bearing debts has been paid to the date the debts are paid;
ensure that no person who applies to be registered as a bankruptcy trustee can be registered unless, at that time, the person has the ability - and not merely the capacity to acquire the ability - satisfactorily to perform the duties of a registered trustee;
increase the statutory minimum remuneration for registered trustees by 8.4% to take account of the impact of the goods and services tax and other tax reform measures;
allow bankruptcy administrations to be transferred from one trustee to another, without a formal meeting of creditors, provided the creditors agree;
introduce a streamlined procedure to allow variations and terminations of Part X deeds of arrangement and compositions if the debtor is in default and no creditor objects to this procedure;
allow the trustee, rather than the Court, to consent to a bankrupt travelling overseas and, whether or not the bankrupt is a contributor, to impose written conditions on that consent, the breach of which conditions will be an offence;
require that applications for an extension of time for payment of interest charge and realisations charge be made before the payment is due;
extend to Part X trustees eligibility for the assistance available, under section 305, to trustees in a bankruptcy;
abolish a bankrupt's direct access to an external tribunal for review of trustee decisions, eg, those about income contributions and objections to discharge.

Financial impact statement

5 There is a resource implication for the Insolvency and Trustee Service Australia (ITSA) arising from the proposed increase in the income cutoff for debt agreements. Debt agreement numbers have increased markedly in 2001-02 to more than double the number in the previous year and extending access to debt agreements by increasing the income cut-off by 50% to $47,500 will result in further increases. ITSA's role is to assess debt agreement proposals against elgibility criteria, refer them to creditors and supervise the voting on them. An estimated 15 additional staff will be allocated to this activity. It is expected that the financial impact of the other measures in the Bill will offset each other.

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