September 6, 2024

The Bankruptcy Act 1966 (Cth) (Act) regulates Australia's personal insolvency system.

On 8 July 2024, the Commonwealth government announced that it will introduce bankruptcy law reforms. It is unclear when those reforms will be introduced to parliament.

The announcement states that the reforms include:

(a) increasing the threshold for involuntary bankruptcies from AU$10,000 to AU$20,000, with the threshold to be indexed each year;

(b) increasing the timeframe within which a debtor can respond to a Bankruptcy Notice from 21 days to 28 days;

(c) removing the proposal, or acceptance, of a debt agreement as an act of bankruptcy for the purposes of section 40(1) of the Act; and

(d) reducing the period a discharged bankruptcy is publicly recorded on the National Personal Insolvency Index (NPII) from it being a permanent record to being seven years following discharge from bankruptcy.

Additionally, the government is considering the introduction of a Minimal Asset Procedure in Australia. There are other jurisdictions, including New Zealand and England, which have similar models for persons with limited assets and limited debts as an alternative to bankruptcy.

The features of the Minimal Asset Procedure in Australia to be:

(a) eligibility to enter the procedure would include a maximum debt threshold of AU$50,000, a maximum threshold for income to be determined and a maximum threshold of AU$10,000 in assets (with exceptions for tools of trade and a vehicle);

(b) the Minimal Asset Procedure would last for 12 months, with a period of 4 years post-discharge to be listed on the National Personal Insolvency Index;

(c) a debtor will only be able to enter into the Minimal Asset Procedure once during their lifetime, and

(d) a Minimal Asset Procedure should be less onerous than a bankruptcy.

Legislation

Section 43 of the Bankruptcy Act 1966 permits the Court, on the presentation of a petition by a creditor, to make a sequestration order against a debtor where:

(a) a debtor has committed an act of bankruptcy; and

(b) at the time when the act of bankruptcy was committed, the debtor was personally present or ordinarily resident in Australia, had a dwelling - house or place of business in Australia or was carrying on business in Australia,

Upon the making of a Sequestration Order, the debtor becomes a bankrupt.

A creditor cannot petition the Court unless the debtor owes the creditor a liquidated debt, or two or more debts, that amount in aggregate to the statutory minimum of AU$10,000. Under the reforms it will increase to AU$20,000.

Section 40 of the Act sets out the various circumstances in which a person commits an act of bankruptcy.

As the law stands, a debtor commits an act of bankruptcy including (there are various other circumstances set out in section 40 of the Act which are not affected by the proposed reforms) where:

(a) a creditor who has obtained a final judgment or order, serves a bankruptcy notice on a debtor and the debtor does not comply with the notice or satisfy the Court that he or she has a counterclaim, set-off or cross demand equal to or exceeding the amount of the judgment debt;

(b) the debtor gives the Official Receiver a debt agreement proposal; and

(c) a debt agreement proposal given by the debtor to the Official Receiver is accepted by the debtor's creditors.

If the reforms come into effect, neither of the acts above at (b) and (c) will be deemed an act of bankruptcy.

The statutory minimum has been the subject of a number of changes over recent years.

In March 2020, in response to the outbreak of COVID-19, the government introduced an insolvency moratorium which provided temporary changes which were in place until 31 December 2010. Under those changes the statutory minimum debt increased from AU$5,000 to AU$20,000 and the time for a debtor to comply with a bankruptcy notice increased from 21 days to six months.

Following the expiry of the COVID-19 insolvency moratorium, the statutory minimum was amended to AU$10,000 and the time to respond to a Bankruptcy Notice reverted to 21 days.

The reforms will see the statutory minimum return to the level required during the COVID 19 insolvency moratorium period, being AU$20,000, with that amount to be indexed upwards each year.

Impact of the reforms

Statistics published by the Australian Financial Security Authority (AFSA), the executive agency responsible for performing various roles under the Act, show that the number of people entering bankruptcy through sequestration orders has not returned to the levels prior to the Covid-19 insolvency moratorium.

The changes to the debt threshold may be an attempt to reduce the proportion of debtors with relatively small debts being made bankrupt.

According to AFSA's report on the State of the Personal Insolvency System published in December 2023, the proportion of debtors with less than AU$50,000 in liabilities has consistently represented a large part of the overall personal insolvency system. And, since the COVID-19 pandemic that proportion has subsequently increased, reaching 52.7% in 2022-23.

The impact the proposed amendments have on the number of involuntary bankruptcies remains to be seen but they will almost certainly reduce the instances of involuntary bankruptcies at least in the short term; perhaps until recalcitrant debtors amass debts of more than AU$20,000.

Are the proposals a "free kick" of AU$20,000 to bad debtors, or will the changes move the change shift legitimate debt recovery away from the Commonwealth's bankruptcy regime to the States' lower Court's systems and the application of seizure and sale of property or means tests and payment plans. Perhaps it will see creditors hold off pursuing debts until the interest and other charges push the debt above the new AU$20,000 limit.

The proposals will certainly not encourage good market behaviour or discourage or prevent bad debtors from incurring bad debt.

Creditors considering applying the process will need to be aware of the looming changes and their timing.

Creditors need to also remain mindful that the Court could consider that a Bankruptcy Notice issued for the purpose of applying pressure on a debtor other than to invoke the Court's jurisdiction in relation to insolvency as an abuse of process. However, the Court has confirmed it is not an abuse of process if a creditor genuinely intends to pursue the matter if the debtor defaults in complying with the Bankruptcy Notice.

The NPII

The other significant reform relates to the recording of bankruptcies on the National Personal Insolvency Index (NPII).

The NPII is an electronic public record of all insolvencies in Australia. It can be accessed by anyone for a fee.

As the law currently stands, a bankruptcy is recorded on the NPII permanently.

After the reforms are passed however, the record of a person's bankruptcy will be removed from the NPII after seven years following the discharge of the bankruptcy.

This is a change which anyone who uses the NPII as part of their business practice, including lenders, will need to be aware of.

Dentons is available to consider and advise you and your business about the enforcement of debts and the conduct of bankruptcy proceedings.