Senate

Revised Explanatory Memorandum

(Circulated by authority of the Attorney-General, the Honourable Philip Ruddock MP)

Readers' Guide, financial impact statement and notes on sections

Readers' Guide

This Explanatory Memorandum is divided into three main sections: a general outline of the main provisions of the Bankruptcy Legislation Amendment Bill 2004 (the Bill) (Section 1); a discussion of the main policy objectives underlying each of the provisions (Section 2, commencing at page ); and a detailed discussion of each provision, item by item (Section 3, commencing at page ).

Section 1 - General Outline

2 The Bankruptcy Legislation Amendment Bill 2004 (the Bill) will make a number of significant changes to Part X of the Bankruptcy Act 1966 (the Act). These changes arise following a review of the operation of Part X conducted by the Insolvency and Trustee Service Australia and the Attorney-General's Department.

3 The objects of this Bill are to:

(a)

enhance the integrity of Part X arrangements by increasing the disclosure requirements imposed on those involved in such arrangements; and

(b)

streamline the operation of Part X by providing a single type of agreement which will replace the existing three types as well as simplify the processes for setting aside and terminating such agreements.

4 The amendments relating to Part X including, necessary changes to the form of a statement of affairs for purposes other than Part XI, are found in Schedule 1 of the Bill.

5 The Bill also proposes to make related changes to Division 6 of Part IV of the Act which provide for post-bankruptcy compositions and schemes of arrangement. These changes are found in Schedule 2 of the Bill.

6 Some of the amendments necessary to implement the findings of the Part X review affect the operation of the Act generally and it is proposed that they apply to all types of administration under the Act. These amendments relate to the performance standards expected of registered trustees (Schedule 3) and false and misleading statements by creditors in voting documents (Schedule 4).

7 Other amendments proposed by the Bill are consequential on the above measures or are minor and technical changes designed to streamline the operation of the Act. These amendments are found in Schedules 5 and 6 of the Bill.

8 The Bill also proposes amendments to the Bankruptcy Legislation Amendment Act 2002 to correct a drafting error in the transitional provisions contained in that Act. These amendments are found in Schedule 7 of the Bill.

Financial Impact Statement

9 The amendments proposed by this Bill will have no significant financial impact.

Section 2 - Policy objectives

10 The amendments proposed by this Bill arise from the report on the review of the operation of Part X of the Bankruptcy Act 1966 conducted by the Insolvency and Trustee Service Australia and the Attorney-General's Department. On 14 October 2003, the Attorney-General, the Hon Philip Ruddock MP announced the release of the report on the review. The report and proposals for legislative change (contained in the Attorney-General's media release) are available from the website of the Insolvency and Trustee Service Australia (ITSA) at www.itsa.gov.au.

11 The Government decided to conduct the review following concerns related to potential conflicts arising from the relationship between the debtor and the controlling trustee as well as the impact on the outcome of the meeting where the debtor has so-called 'friendly' creditors who are associated entities or family members. However, the review was not limited to dealing with these issues and also considered whether arrangements between debtors and their creditors without sequestration are still a useful feature of the personal insolvency system.

12 The Issues Paper which was released at the start of the review identified a number of potential problems for discussion:

1.

'Friendly' creditors-concerns that a debtor may be able to manipulate the outcome of the vote.

2.

Quality of reports by controlling trustees-concerns about the quality, and lack of, information provided by controlling trustees which may be related to their performance or the short time frame allowed for investigations and report.

3.

Voting requirements-concerns that the special resolution requirement can be onerous and may be the reason behind attempts by debtors to manipulate outcomes of meeting.

4.

Purchase of proxies-concerns that in a number of cases a creditor who effectively has the deciding vote had been persuaded to vote in favour of the proposal by accepting a fee to assign their proxy.

5.

Decline in use of Part X arrangements-the number has steadily declined: 1285 in 87/88, 552 in 95/96 to 424 in 00/01 and no research had been conducted into possible reasons.

6.

Rate of return to creditors-concerns about the very low returns achieved in Part X administrations.

7.

Role of the trustee-concerned a perception that some controlling trustees and trustees treat the debtor as their client and are not acting independently.

8.

Creditors' meetings-concerns about the way meetings have been conducted by the trustee, for example, trustee practices in allowing creditors to ask questions of the debtor before deciding how to vote or not providing such an opportunity by advising the debtor not to attend because the trustee believes creditors will not attend.

9.

Extent of Inspector-General's powers-concerns that the Inspector-General's powers to overturn a Part X following an investigation are limited and that limitation may pose a threat to the integrity of Part X.

13 There was extensive consultation in the course of the review. The Issues Paper was the subject of discussion at focus groups in each State and Territory and written submissions were received from major stakeholders including financial counsellors, registered trustees and major creditors.

14 The review found that there was general endorsement of the utility and performance of Part X and that fundamental change was not necessary. However, the review identified a number of possible reforms to increase the effectiveness and efficiency of the system and to enhance its overall integrity.

15 The amendments proposed in this Bill will enhance the integrity of the Part X process but will not affect the fundamental policy underpinning Part X of providing a simple and flexible process for debtors and creditors to come to an agreement without sequestration.

16 To introduce greater simplicity and flexibility to the Part X process, it is proposed to provide for a single type of generic Part X agreement which would, by agreement between the debtor and creditors, incorporate elements of the three types currently found in Part X. These arrangements will be known as 'personal insolvency agreements' instead of 'Part X arrangements' as that term fails to describe what these arrangements are actually about.

17 There would be standard provisions which would need to be elected by creditors and flexible arrangements would be provided for varying the proposal. Those standard provisions will include the following matters:

•

the property or income of the debtor to be dealt with in the agreement (including whether this includes 'after-acquired' property)

•

whether the antecedent transaction provisions would be available to recover any assets disposed of to third parties prior to the agreement

•

whether the standard rules of distribution of dividends would apply, and if not, to set out the applicable rules

•

whether the debtor is to be released from provable debts (fully or partially) and if a release can occur, to specify when this would happen

18 If accepted by a special resolution, the agreement would require execution of a deed. However, on a trustee's determination that the debtor is in material breach of the agreement, termination of the agreement is proposed to be by passage of an ordinary resolution.

19 The current process for judicial review of the deeds or composition is proposed to be simplified. For example, it is proposed to replace the current review with a simple and consistent method of terminating or avoiding the Part X agreement which will extend to a power to make restitution. In particular, to recognise that the parties' agreement is paramount, the current requirement that the avoidance of an agreement must to be 'in the interests of creditors' will be removed when the basis for seeking the order is that the requirements of Part X were not met.

20 Changes proposed to enhance the integrity of the Part X process will include increased disclosure requirements in relation to the information provided to debtors and creditors. For example, prescribed information will be provided to debtors contemplating a Part X proposal and to creditors about their rights. It is proposed that debtors and creditors will be required to disclose their relationship and creditors will be required to disclose any collateral agreements regarding voting.

21 Other proposed increased disclosure requirements will affect controlling trustees and trustees. For example, there will be a declaration of interests by controlling trustees and trustees.

22 The Statement of Affairs will be made available to the controlling trustee before the execution of the authority and the controlling trustee will need to file the executed Statement with ITSA for creditors' access.

23 Other changes proposed to enhance the integrity of the Part X process will affect the following broad areas:

•

Practitioner standards of technical proficiency and fundamental obligations-For example, it is proposed that a regulation making power will be introduced to provide standards of performance to satisfy the legislative obligations of practitioners. In addition, other proposed changes will extend to protecting a practitioner's right to recovery and indemnity of remuneration.

•

Enhancing the effectiveness of the Part X administrators-For example, investigatory and recovery powers will be provided to controlling trustees and trustees; and the Courts will be empowered to vary agreements to remedy defects which act to prevent achievement of the parties' intentions.

Section 3 - Notes on sections and Schedule items

Section 1 - Short Title

24 The Bankruptcy Legislation Amendment Bill 2004 (the Bill) proposes amendments to the Bankruptcy Act 1966 (the Act) and the Bankruptcy Legislation Amendment Act 2002. By proposed section 1, when the Bill has been enacted, it will be known as the Bankruptcy Legislation Amendment Act 2004.

Section 2 - Commencement

25 In accordance with the table in proposed section 2, proposed sections 1 to 3 and anything in the Bill not elsewhere covered in that table will commence on the day of Royal Assent. Proposed Schedules 1, 2, 3, 4 and 5 will commence on a day to be fixed by Proclamation. If the proclaimed day has a date more than 6 months after the day of Royal Assent, the Schedule 1 provisions will commence on the first day after the end of that 6 months period. Schedule 6 will commence immediately after the commencement of Schedule 1 to the Bankruptcy Legislation Amendment Act 2002 (that date being 5 May 2003).

Section 3 - Schedules

26 Proposed section 3 is a drafting device to allow all the amendments proposed to be made to the Bankruptcy Act 1966 and the Bankruptcy Legislation Amendment Act 2002 to be set out in Schedules (each dealing with a different subject area). The items in the Schedules will amend the Act and will have effect according to their terms. Notes on the Schedule items follow.