House of Representatives

Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007

Second Reading Speech

Mr Ruddock (Berowra-Attorney-General)

I move:

That this bill be now read a second time.

The Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 will amend the Bankruptcy Act 1966 to improve the operation of debt agreements under part IX of that act.

Details of most of these amendments were announced on 27 July 2006 following a comprehensive review of the operation of debt agreements conducted by the Insolvency and Trustee Service Australia and the Attorney-General's Department. In addition to the amendments previously announced, the bill also includes a range of other minor and technical amendments which will improve, streamline and clarify some aspects of the operation of part IX.

Debt agreements are an important feature of the personal insolvency system. They provide debtors with unmanageable debt who can afford to make some payments to creditors with an opportunity to do so. Many debtors want to consider making a debt agreement as it gives them an opportunity to recover a damaged financial reputation and avoid bankruptcy. When a debt agreement works, it will generally provide a higher return to creditors than bankruptcy and can also assist the debtor to manage their finances more effectively in the future.

When debt agreements were introduced, it was envisaged that they could be administered by anyone, including the debtor personally, a relative or friend. However, in practice, the vast majority of agreements are administered by a fee-for-service provider who may or may not provide other services. This has led to calls for greater regulation of that industry to ensure vulnerable debtors are protected and proper standards of practice are met.

The reforms are designed to ensure that debt agreements continue to be a viable means of dealing with unmanageable debt. In particular, they are designed to address key concerns which have led to a lack of confidence on the part of creditors in the effectiveness of the debt agreement system. They are also aimed at addressing the high failure rate which has resulted from a significant number of unsustainable agreements being made where debtors are not properly informed and creditors cannot rely on the quality or accuracy of information given to them.

The amendments will introduce a registration system for debt agreement administrators. Registration will be based on the applicant's demonstrated ability to perform the duties of a debt agreement administrator. These duties will include obligations to ensure the debtor is informed about other options and has been through a proper process to determine that the offer to creditors is sustainable over the life of the agreement. The administrator will also be required to form a reasonable basis for believing that the debtor has fully and truly disclosed his or her affairs to creditors. These obligations are designed to ensure that debtors consider all options and that creditors are fully informed when deciding whether to accept the debtor's proposal.

The requirement to be registered will apply only to a debt agreement administrator who administers more than five agreements at any time. This will ensure that debtors retain the option of administering the agreement personally or getting another person to do it on their behalf.

The Inspector-General in Bankruptcy will make decisions on registration and will then have an ongoing role in monitoring the conduct and performance of registered administrators. The inspector-general will be able to deregister administrators who do not comply with their obligations. There will be mandatory qualifications as a prerequisite to registration to ensure that minimum standards of knowledge apply across the industry.

The amendments will require administrators to be paid proportionately over the life of a debt agreement rather than in priority to creditors. They will provide an incentive for administrators to see that agreements are completed and encourage them to focus on proposals that are likely to succeed, rather than those that are likely to be accepted by creditors.

A debt agreement should be seen as a simple, one-off offer to creditors which represents the best offer the debtor can make. Creditors then decide whether to accept or reject that offer based on the debtor's capacity to pay. A debt agreement should be viewed as a collective agreement with all creditors rather than a series of agreements with each individual creditor. Therefore, the amendments will require creditors to receive payments under the agreement proportionately in relation to the amount of their debts. This will overcome current problems which result in offers being developed based on expectations of individual creditors rather than on what the debtor can afford to pay. It should also open up debt agreements to many debtors who could afford to make payments which are greater than creditors would receive in bankruptcy and in circumstances in which the debtor is unable to negotiate effectively with individual creditors.

The amendments will also provide that a debtor's proposal can be accepted by a majority in value of creditors who vote so that the decision is made by those creditors holding the majority of the commercial interest. The current requirement for a special majority of more than half in number and at least three-quarters in value unfairly skews the voting power in favour of a small number of larger creditors.

The amendments will also introduce more effective mechanisms for dealing with default by the debtor. The administrator will be required to notify creditors when the debtor has been in default for three months and an agreement will be terminated automatically where the debtor has made no payments for six months or the agreement is not completed within six months of the agreed term. This will ensure defaults are actively managed by administrators and allow creditors to make timely decisions about varying or terminating agreements where the debtor is not complying.

Finally, the bill includes a number of amendments which will clarify and streamline the operation of the act in a number of areas, including replacing administrators who are deregistered, uncertainty about which debts are covered by an agreement, the treatment of secured creditors and the investigative powers of the inspector-general.

I commend the bill to the House.

Debate (on motion by Mr Edwards) adjourned.