Senate

Replacement Explanatory Memorandum

(Circulated by authority of the Attorney-General, the Hon Christian Porter MP)

Schedule 2 - Debt agreements

AMENDMENTS TO THE BANKRUPTCY ACT 1966

GENERAL OUTLINE

112. The amendments in Schedule 2 set standards for the operation of debt agreements. These amendments cover the length of debt agreements and mechanisms for terminating and voiding debt agreements. The amendments also cover an administrator's duties in their administration of debt agreements.

Part 1 of Schedule 2 - Length of debt agreements

Item 1 - After subsection 185C(2)

113. Section 185C provides the requirements for a debt agreement proposal. Currently, there is no limitation on the proposed timeframe for making payments under the proposed debt agreement. As a consequence, debt agreements are frequently running for longer than five years, in part due to debtors proposing one or more variations to the debt agreement.

114. The option for a debtor to prolong a debt agreement through a variation could discourage a debtor and its proposed administrator from exercising financial prudence at the debt agreement proposal stage. For example, a debtor may commit to a payment schedule that is likely to be unaffordable, knowing that he or she can simply prolong the agreement if they cannot maintain the payments.

115. The absence of a limitation on the proposed timeframe could also contribute to unreasonably high dividend rates for lower income debtors. For example, if a debtor can only afford to pay a certain amount of money per month, it will always be possible to lengthen an agreement to meet that monthly payment. A creditor or the proposed administrator is therefore able to request an unreasonably high dividend or remuneration rate.

116. A long debt agreement prevents an insolvent debtor from achieving a fresh start. Item 1 of Part 1 Schedule 2 inserts a new provision into section 185C to specify that a debt agreement proposal must not propose to make payments under the agreement for a timeframe longer than three years from the day the agreement was made. A note in the new provision directs the reader to section 185H which clarifies 'when' a debt agreement is made. A three year timeframe aligns with the length of income contributions under bankruptcy.

Item 2 - Paragraph 185E(2)(a)

117. Section 185E provides the circumstances under which the Official Receiver may accept a debt agreement proposal for processing. This includes a requirement for the Official Receiver to be satisfied that subsections 185C(2), (2A), (2B), (2E) and (4) have been complied with.

118. Item 1 of Part 1 Schedule 2 inserts a new subsection 185C(2AA) into section 185C to specify that a debt agreement proposal must not propose to make payments under the agreement for a timeframe longer than three years.

119. Item 2 of Part 1 Schedule 2 inserts a reference to new subsection 185C(2AA) into paragraph 185E(2)(a) to ensure that the Official Receiver does not accept a debt agreement proposal for processing if it proposes to make payments under the agreement for a timeframe longer than three years.

Items 3 and 4 - After subsection 185M(1C) and subsection 185M

120. Under subsection 185M(1) a debtor or a creditor who is a party to a debt agreement may give the Official Receiver a written proposal to vary the debt agreement. Currently, there is no limitation on the proposed timeframe for making payments under the agreement, including through a proposal to vary an existing debt agreement.

121. Item 3 of Part 1 Schedule 2 inserts a new subsection 185M(1D) to ensure that existing debt agreements cannot propose a variation if the timeframe for making payments under the agreement would be longer than three years from the day the agreement was made. A note in the new provision directs the reader to section 185H which clarifies 'when' a debt agreement is taken to be made.

122. Under subsection 185M(2), the Official Receiver must process a proposal to vary a debt agreement if the Official Receiver is satisfied that the proposal is in the approved form and is accompanied by an explanatory statement containing the relevant information. Item 4 of Part 1 Schedule 2 inserts a reference to new subsection 185M(1D) into subsection 185M(2) to ensure that the Official Receiver does not process the variation if the proposed timeframe for making payments under the agreement would be longer than three years from the day the agreement was made.

123. These amendments align with the new provision (subsection 185C(2AA)) inserted by item 1 of Part 1 Schedule 2 that provides a debt agreement proposal must not propose to make payments under the agreement for a timeframe longer than three years from the day the agreement was made.

124. The amendments created by Part 1 Schedule 2 limit the payment timeframe that a debtor can propose , either through the initial proposal or variation, to three years. This limitation does not prevent a debt agreement from running longer than the proposed timeframe, even if the agreement has run longer than three years. For example, suppose a debtor proposes a three year timeframe for making payments under a debt agreement, but has been unable to discharge the obligations after three years after the day the agreement was made. Despite surpassing the proposed timeframe, the debt agreement will continue until it is terminated by six month arrears default under section 185QA (if it does not end or terminate earlier under another provision).

Item 5 - Application provisions

125. Item 5 sets out the application provisions for amendments to the Bankruptcy Act made under Part 1 Schedule 2.

126. The amendments to section 185C (item 1 - limiting the proposed timeframe for making payments under the agreement to three years) and section 185E (item 2 - prohibiting the Official Receiver from accepting a debt agreement proposal for a debt agreement that proposes to make payments under the agreement for a timeframe longer than three years) will apply in relation to debt agreement proposals given to the Official Receiver on or after the commencement of item 5 of Part 1 Schedule 2. Part 1 commences the day after the end of the period of six months beginning on the day the Amending Act receives the Royal Assent. This will ensure that new debt agreement proposals cannot propose to make payments under the agreement for a timeframe longer than three years.

127. The amendments to section 185M (items 3 and 4 - prohibiting variations to debt agreements that would extend the proposed timeframe to beyond three years) will apply in relation to debt agreements that come into force on or after the commencement of item 5 of Part 1 Schedule 2, where the debt agreement proposals were given on or after that commencement. This will ensure that the restriction on proposed timeframes does not apply to a variation proposal unless the original proposal was also subject to the same restriction.

Part 2 of Schedule 2 - Proposals to vary debt agreements

Items 6 and 7 - After subsection 185LG(2) and after subsection 185M(1D)

128. Item 20 of Part 4 Schedule 1 inserts new paragraph 185C(4)(e), which provides that the debtor cannot give the Official Receiver a debt agreement proposal if the total payment as a percentage of the debtor's after-tax income (the proposal percentage ) exceeds the percentage prescribed by the Minister under new subsection 185C(4B) (the prescribed percentage ). The proposal percentage is unique to each debtor's proposal. As per the formula included by new paragraph 185C(4)(e), the proposal percentage equals the debtor's total payments under the agreement divided by the debtor's after-tax income. Note: the terms proposal percentage and prescribed percentage are not used in the Bill.

129. Item 21 of Part 4 Schedule 1 inserts new subsection 185C(4B) which provides that the Minister can determine the prescribed percentage by legislative instrument under new subsection 185C(4B).

130. Comparing a debtor's total payments under a debt agreement to their after tax income is a useful gauge for the sustainability of a payment schedule, since a debtor's income is usually the primary source of their payments.

131. Comparing a yearly figure (the debtor's after tax income) with an amount which, in most instances, will not correspond to a one-year timeframe (the total amount of payments the debtor is required to make under a debt agreement), creates an asymmetry of parameters in the formula. Due to this asymmetry, an appropriate prescribed percentage would need to account for the fact that agreements last for different timeframes.

132. Item 1 of Part 1 Schedule 2 inserts a new provision into section 185C to specify that a debt agreement proposal must not propose to make payments under the agreement for a timeframe longer than three years from the day the agreement was made. By limiting the proposed timeframe for making payments under a debt agreement to three years, the Minister can calibrate the prescribed percentage to a three year payment schedule.

133. Calibrating the prescribed percentage to three years would not always capture an excessive payment schedule caused by a timeframe less than three years. For example, suppose that the prescribed percentage set at 150%. The effect of this percentage is that an insolvent debtor, Rosie, with an after-tax income of $70,000 could comply with the prescribed percentage by proposing to pay $105,000 or less. Suppose Rosie proposes to pay $90,000 in total under her debt agreement, over a three year period. This may be affordable for Rosie; however it would be unaffordable for Rosie to pay $90,000 over a one-year period. However, since the payment to income ratio formula only includes the total payments under the agreement, the formula does not discern between different timeframes at which the debtor proposes to make payments. Accordingly, the formula may not capture an excessive payment schedule caused by a timeframe less than years. The prescribed percentage in the above example is intended to be illustrative only, and is not indicative of the expected percentage.

134. In this instance, the Bankruptcy Act, as amended by the Bill, would contain other safeguards that could prevent such an agreement from coming into force. For example, the proposed administrator is required to certify that the debt agreement is sustainable under paragraph 185C(2D)(c). The Official Receiver could also use its powers created by Part 5, Schedule 1 to refuse the debt agreement proposal on the basis that complying with the agreement would cause the debtor undue hardship.

135. The legislative instrument making power exercisable by the Minister to determine the prescribed percentage , under new subsection 185C(4B), is a debtor-protection safeguard. As such, item 19 of Part 4 Schedule 1 amends subsection 10(1) to provide that the Minister cannot delegate this power.

136. Notwithstanding paragraph 185C(2D)(c), and the amendments in Part 4 Schedule 1, the debt agreement administrator is not currently required to certify that a variation proposal made under section 185M is sustainable. As such, it is currently possible for debt agreements to be varied in a manner which creates unsustainable payment obligations for the debtor.

137. Item 7 of Part 2 Schedule 2 inserts new subsection 185M(1E), which provides a formula to calculate the proposal percentage applying to a variation proposal. The proposal percentage at the variation stage equals the total of the payments that the debtor would be required to make under the varied agreement divided by the debtor's after tax income in the year beginning at the proposal time.

138. The formula uses the debtor's after-tax income estimation from the debt agreement proposal, rather than the debtor's after-tax income applying at the time the variation proposal is given. The purpose of using the initial after-tax income estimate is to prevent debtors being pressured, either by the administrator or an affected creditor, to increase payments under the agreement if the debtor's income increases.

139. Under paragraph 185C(2D)(c), the proposed administrator is required to certify that the payments under the debt agreement proposal are sustainable. 'Sustainability' in this context refers to the debtor being able to discharge the obligations created by the debt agreement as and when they fall due. This provision prevents the debtor and creditors from entering into agreements that are likely to fail. It also ensures that the debtor does not endure undue financial hardship by committing to an unfeasible payment schedule.

140. Notwithstanding paragraph 185C(2D)(c), and the amendments in Part 4 Schedule 1, the debt agreement administrator is not currently required to certify that a variation proposal made under section 185M is sustainable. As such, it is currently possible for debt agreements to be varied in a manner which creates unsustainable payment obligations for the debtor.

141. Item 7 of Part 2 Schedule 2 inserts subsection 185M(1F) aimed at ensuring variations to a debt agreement are sustainable.

142. New subsection 185M(1F) requires the debt agreement administrator to certify that the debtor is likely to be able to discharge the obligations created by the agreement (as proposed to be varied) as and when they fall due. This creates an alignment with the existing requirements of administrators under paragraph 185C(2D)(c) when dealing with proposals to enter into debt agreements.

143. Item 6 of Part 2 Schedule 2 inserts subsection 185LA(3) to ensure that the debt agreement administrator certifies that the information contained in a subsection 185M(1F) certificate (relating to the sustainability of payment under a varied agreement) is correct before signing it. Given the consequences to a debtor and affected creditors of entering into an unsustainable agreement, a debt agreement administrator that breaches this duty can be issued with a show-cause notice under sections 186K or 186L, which can result in cancellation of registration as a debt agreement administrator.

Item 8 - Subsection 185M(2)

144. Under subsection 185M(2), the Official Receiver may process a proposal to vary a debt agreement if it is satisfied that the proposal is in the approved form and is accompanied by an explanatory statement containing the relevant information. Item 8 of Part 2 Schedule 2 inserts a reference to new subsections 185M(1E) and (1F) into subsection 185M(2).

Item 9 - After subsection 185M(2)

145. The amendments contained in Parts 1 and 2 of Schedule 2 are intended to ensure that debt agreements cannot be varied in a manner which creates unsustainable payment obligations for the debtor. Under subsection 185M(2), the Official Receiver must process a proposal to vary a debt agreement if it is satisfied that the proposal is in the approved form and is accompanied by an explanatory statement containing the relevant information. Item 4 of Part 1 Schedule 2 inserts a reference to new subsection 185M(1D) into subsection 185M(2) to ensure that the Official Receiver does not process the variation if the proposed timeframe for making payments under the agreement would be longer than three years from the day the agreement was made.

146. Items 6 and 7 of Part 2 Schedule 2 also insert new subsections 185M(1E) and 185M(1F), which provide a formula to be used to calculate the amount allowable for repayment under a variation to a debt agreement, and require the debt agreement administrator to certify that the debtor is likely to be able to discharge the obligations created by the agreement (as proposed to be varied) as and when they fall due.

147. Consistent with other amendments contained in Parts 1 and 2 of Schedule 2, item 9 of Part 2 Schedule 2 inserts a new subsection 185M(2A), which provides that the Official Receiver can refuse to accept a debt agreement variation proposal for processing if the Official Receiver reasonably believes that complying with the debt agreement (as proposed to be varied) would cause undue hardship to the debtor.

148. This provision aligns the debt agreement variation proposal stage with the insertion of new subsection 185E(2AB) at the debt agreement proposal stage (as inserted by item 23 of Part 5 Schedule 1). In line with the intent of new subsection 185E(2AB), it is envisaged that the Official Receiver would only be called upon in exceptional circumstances to consider whether to exercise its discretion under new subsection 185M(2A) not to send the debt agreement variation proposal to affected creditors for voting. For example, when facts have been brought to the Official Receiver's attention which leads the Official Receiver to reasonably believe that complying with the debt agreement (as proposed to be varied) would cause the debtor undue hardship.

149. Under current subsection 185E(4), the debtor has a right to apply to the Administrative Appeals Tribunal (AAT) for a review of the Official Receiver's decision on whether to accept a debt agreement proposal for processing. Similarly, subsection 185MD(4) makes provision for a debtor or an affected creditor to apply to the AAT for a review of the Official Receiver's decision to withdraw a proposal to vary a debt agreement under subsection 185MD(2). Subsection 185MD(3) further requires the Official Receiver to provide written notice of the decision, and the reasons for the decision, to withdraw a proposal to vary a debt agreement to the debtor and any affected creditors who are known to the Official Receiver. No similar provisions currently exist to allow for a debtor or an affected creditor in relation to the Official Receiver's decision not to process a debt agreement variation proposal.

150. According to the Attorney-General's Department's Australian Administrative Law Policy Guide , as a matter of policy, an administrative decision that will, or is likely to, adversely affect the interests of a person should be subject to merits review, unless it would be inappropriate or there are factors justifying the exclusion of merits review. In line with this principle, and to ensure consistency with subsections 185E(4) and 185MD(3) and (4), item 9 of Part 2 Schedule 2 also inserts new subsections 185M(2B) and (2C).

151. New subsection 185M(2B) requires the Official Receiver to provide written notice of the decision, and the reasons for the decision, not to process a proposal to vary a debt agreement to the debtor and any affected creditors who are known to the Official Receiver. New subsection 185M(2C) further allows the debtor or an affected creditor to seek AAT review of that decision.

Items 10 and 11 - At the end of section 185MA and after subsection 185MC(1)

152. Currently, on processing a proposal to vary a debt agreement, subsection 185MA(1) requires the Official Receiver to seek approval to the variation from each affected creditor. Paragraph 185MA(2)(a) ensures each affected creditor receives a copy of the debt agreement variation proposal and an explanatory statement, to assist with the approval process.

153. If the debt agreement administrator charged an upfront fee before the debtor submitted the debt agreement proposal, and the debtor had not fully paid the fee when they submitted the debt agreement proposal, the administrator would be an affected creditor with voting rights at the proposal and variation stages. The administrator could also have voting rights under a debt agreement they are administering if they hold a credit licence and previously lent the debtor money. Alternatively, a related entity of the administrator could be an affected creditor of the debt agreement to be varied.

154. Allowing an administrator, or its related entity, to vote on a variation to an agreement they are administering creates a conflict of interest. If the administrator is the only creditor to vote on a variation proposal, its vote will bind all creditors. Alternatively, the voting result may turn on the administrator's vote. This conflict of interest undermines public and creditor confidence in the debt agreement system.

155. Item 10 therefore inserts a new subsection 185MA(4). New paragraph 185MA(4)(a) provides that the Official Receiver should not request a vote on a debt agreement variation proposal from an administrator that is an affected creditor. This provision aligns with new paragraph 185EA(4)(a), inserted by item 39 of Part 6 Schedule 1, which provides that the Official Receiver must not seek a vote on a debt agreement proposal from a proposed administrator.

156. Under subsection 185C(2D), an original debt agreement proposal provided to the Official Receiver must be accompanied by a certificate signed by the proposed administrator, certifying the proposed administrator has satisfied various requirements in setting up the debt agreement proposal with the debtor. Item 33 of Part 6 Schedule 1 inserts new paragraph 185C(2D)(g), which requires the proposed administrator to declare whether an affected creditor is also a related entity in the subsection 185C(2D) certificate. Since the debtor submits the subsection 185C(2D) certificate to the Official Receiver at the debt agreement proposal stage, the Official Receiver will therefore be able to identify which affected creditors are related entities of the proposed administrator.

157. Under new paragraph 185MA(4)(b), the Official Receiver will not seek a vote from these affected creditors on the proposal to vary the debt agreement. This provision aligns with new paragraph 185EA(4)(b), inserted by item 39 of Part 6 Schedule 1, which provides that the Official Receiver must not seek a vote on a debt agreement proposal from an affected creditor who was a related entity to the proposed administrator upon becoming an affected creditor.

158. Currently subsection 185MC(1) provides the rule for acceptance of a variation proposal. In order for the proposal to be accepted, a majority in value of affected creditors who reply to the Official Receiver's request for a vote (under subsection 185MA(1)) must accept the debt agreement variation proposal.

159. To ensure the results of the vote are not impacted by potential conflicts of interest, item 11 inserts new subsection 185MC(1A) which amends the acceptance rule to require the Official Receiver to disregard any votes from the proposed administrator or a related entity of the proposed administrator.

160. These amendments align with the amendments made at items 39 and 40 of Part 6 Schedule 1 which preclude the administrator or a related entity of the administrator from voting on a proposal to establish a debt agreement. Together with the amendments at items 13 and 14 of Part 3 Schedule 2, these amendments will reduce conflicts of interest and increase fairness for affected creditors in the voting process.

Item 12 - At the end of section 185MC

161. Item 12 inserts subsection 185MC(6), which introduces an offence for a debt agreement administrator that gives, agrees, or offers to give an affected creditor any valuable consideration with a view to securing the affected creditor's acceptance or non-acceptance of the proposal to vary the agreement. This will expressly prohibit administrators offering affected creditors cash payments in return for the creditor voting to approve the variation to the debt agreement.

162. The offence for an administrator contravening new subsection 185MC(6) is three months' imprisonment. These amendments align with the amendments made at item 41 of Part 6 Schedule 1 which introduces an offence for a debt agreement administrator that gives, agrees or offers to give an affected creditor valuable consideration in relation to a proposal to accept a debt agreement. This punishment is appropriate to deter fraudulent conduct in the financial sector which can have severe consequence for both creditors and debtors.

Item 13 - Application provisions

163. Item 13 sets out the application provisions for amendments to the Bankruptcy Act made under Part 2 Schedule 2. These application provisions ensure that the amendments do not apply to proposals to vary debt agreements, where the original debt agreement proposal was given to the Official Receiver before commencement of item 13, being immediately after the commencement of item 5 of Part 1 Schedule 2. This means the amendments will only apply to debt agreements which were proposed immediately after the end of the period of six months beginning on the day the Amending Act receives the Royal Assent.

Part 3 of Schedule 2 - Proposals to terminate debt agreements

Items 14 and 15 - At the end of section 185PA and after subsection 185PC(1)

164. Currently, on processing a proposal to terminate a debt agreement, subsection 185PA(1) requires the Official Receiver to seek approval to the termination from each affected creditor. Paragraph 185PA(2)(a) ensures each affected creditor receives a copy of the debt agreement termination proposal and an explanatory statement, to assist with the approval process.

165. If the debt agreement administrator charged an upfront fee before the debtor submitted the debt agreement proposal, and the debtor had not fully paid the fee when they submitted the debt agreement proposal, the administrator would be an affected creditor with voting rights at the proposal, variation and termination stages. The administrator could also have voting rights under a debt agreement they are administering if they hold a credit licence and previously lent the debtor money. Alternatively, a related entity of the administrator could be an affected creditor of the debt agreement to be terminated.

166. Allowing an administrator, or its related entity, to vote on a proposal to terminate a debt agreement they are administering creates a conflict of interest. If the administrator is the only creditor to vote on a termination proposal, its vote will bind all creditors. Alternatively, the voting result may turn on the administrator's vote. This conflict of interest undermines public and creditor confidence in the debt agreement system.

167. Item 14 therefore inserts a new subsection 185PA(4). New paragraph 185PA(4)(a) provides that the Official Receiver should not request a vote on a proposal to terminate a debt agreement from an administrator that is an affected creditor. This provision aligns with new paragraph 185EA(4)(a), inserted by item 39 of Part 6 Schedule 1, and new paragraph 185MA(4)(a), inserted by item 10 of Part 2 Schedule 2, which provide that the Official Receiver must not seek a vote on a proposal to establish or vary a debt agreement from a proposed administrator.

168. Under subsection 185C(2D), an original debt agreement proposal provided to the Official Receiver must be accompanied by a certificate signed by the proposed administrator, certifying the proposed administrator has satisfied various requirements in setting up the debt agreement proposal with the debtor. Item 33 of Part 6 Schedule 1 inserts new paragraph 185C(2D)(g), which requires the proposed administrator to declare whether an affected creditor is also a related entity in the subsection 185C(2D) certificate. Since the debtor submits the subsection 185C(2D) certificate to the Official Receiver at the debt agreement proposal stage, the Official Receiver will therefore be able to identify which affected creditors are related entities of the proposed administrator.

169. Under new paragraph 185PA(4)(b), the Official Receiver will not seek a vote from these affected creditors on the proposal to vary the debt agreement. This provision aligns with new paragraph 185EA(4)(b), inserted by item 39 of Part 6 Schedule 1, and new paragraph 185MA(4)(a), inserted by item 10 of Part 2 Schedule 2, which provide that the Official Receiver must not seek a vote on a proposal to establish or vary a debt agreement from an affected creditor who was a related entity to the proposed administrator upon becoming an affected creditor.

170. Currently subsection 185PC(1) provides the rule for acceptance of a proposal to terminate a debt agreement. In order for the proposal to be accepted, a majority in value of affected creditors who reply to the Official Receiver's request for a vote (under subsection 185PA(1)) must accept the debt agreement termination proposal.

171. To ensure the results of the vote are not impacted by potential conflicts of interest, item 15 inserts new subsection 185PC(1A) which amends the acceptance rule to require the Official Receiver to disregard any votes from the proposed administrator or a related entity of the proposed administrator.

172. These amendments align with the amendments made at items 39 and 40 of Part 6 Schedule 1 which preclude the administrator or a related entity of the administrator from voting on a proposal to establish a debt agreement. Together with the amendments at items 10 and 11 of Part 2 Schedule 2, these amendments will reduce conflicts of interest and increase fairness for affected creditors in the voting process.

Item 16 - At the end of section 185PC

173. Item 16 inserts subsection 185PC(6), which introduces an offence for a debt agreement administrator that gives, agrees, or offers to give an affected creditor any valuable consideration with a view to securing the affected creditor's acceptance or non-acceptance of the proposal to terminate the agreement. This will expressly prohibit administrators offering affected creditors cash payments in return for the creditor voting to approve the termination of the debt agreement.

174. The offence for an administrator contravening new subsection 185PC(6) is three months' imprisonment. These amendments align with the amendments made at item 41 of Part 6 Schedule 1 and item 12 of Part 2 Schedule 2 which introduce offences for a debt agreement administrator that gives, agrees or offers to give an affected creditor valuable consideration in relation to a proposal to accept or vary a debt agreement. This punishment is appropriate to deter fraudulent conduct in the financial sector which can have severe consequence for both creditors and debtors

Item 17 - Application provisions

175. Item 17 sets out the application provisions for amendments to the Bankruptcy Act made under Part 3 Schedule 2. These application provisions ensure that the amendments do not apply to proposals to terminate debt agreements, where the original debt agreement proposal was given to the Official Receiver before commencement of item 17, being immediately after the commencement of Parts 2 to 6 of Schedule 1. This means the amendments will only apply to debt agreements which were proposed immediately after the end of the period of six months beginning on the day the Amending Act receives the Royal Assent.

Part 4 of Schedule 2 - Court orders to terminate debt agreements

Item 18 - After paragraph 185Q(4)(b)

176. Subsection 185Q(4) currently provides that the Court can make an order to terminate a debt agreement in certain circumstances. This includes if the debtor has failed to carry out a term of the agreement, if carrying out the agreement would cause injustice or undue delay to the creditors or the debtor, or for any other reason the agreement should be terminated and it is in the creditors' interest to do so.

177. Item 18 of Part 4 Schedule 2 inserts a new paragraph 185Q(4)(ba) which provides that the Court may make an order to terminate a debt agreement on the grounds that the administrator has contravened any of the new subsections 185EC(6), 185MC(6) or 185PC(6), inserted by item 41 of Part 6 Schedule 1, item 12 of Part 2 Schedule 2 and item 15 of Part 3 Schedule 2. These new provisions make it an offence for the administrator to give, agree or offer to give an affected creditor any valuable consideration (for a vote on a proposal to accept, vary or terminate a debt agreement) with a view to securing the affected creditor's acceptance or non-acceptance of the proposal.

178. Notwithstanding that the Court can currently make orders to terminate an agreement under paragraph 185Q(4)(c) 'for any other reason', this amendment provides express authority for the Court to terminate an agreement for contravention of the new subsections 185EC(6), 185MC(6) or 185PC(6) which is appropriate given the gravity of the offences referred to in those provisions.

Part 5 of Schedule 2 - Voiding debt agreements

Items 19 to 22 - Subsection 185T(2)

179. A debt agreement is not always an appropriate debt relief option for a debtor. Given that many debtors have low financial literacy, an unscrupulous administrator is in a position to exploit a debtor's lack of knowledge. In many circumstances, it is difficult to verify whether a debtor was misled through unprofessional conduct. However in some circumstances, it may be clear that an administrator breached a duty under the Bankruptcy Act in establishing the debt agreement. For example, the administrator might have breached its duty to certify the subsection 185C(2D) certificate, as stated in paragraph 185LG(2)(b).

180. Under paragraph 185Q(4)(b), a debtor can apply to the Court to terminate a debt agreement if it would cause him or her injustice. However, for a debtor that is in a substantially worse position by virtue of having carried out part of a debt agreement, termination cannot undo the harm inflicted on the debtor.

181. Section 185T provides that a debtor, a creditor or the Official Receiver may apply to the Court for an order declaring that all, or a specific part, of a debt agreement is void. Subsection 185T(2) provides the grounds under which an order of that nature may be made. Currently this is limited to two circumstances: if all or part of the debt agreement was not made in accordance with, or comply with, Part IX of the Bankruptcy Act; or if the statement of affairs lodged with the debt agreement omitted a material particular or was incorrect.

182. If an application under section 185T is successful, the Court can order to declare a debt agreement void under subsection 185U(1), and can additionally order compensation under subsection 185U(6). Unlike termination, this empowers a court to put a debtor into a similar position as they would have been had the debt agreement not been entered into. However, it is unclear whether this option is available to a debtor who entered into a debt agreement on the basis of poor administrator conduct amounting to a breach of statutory duty under Part IX of the Bankruptcy Act.

183. Items 19 to 21 of Part 5 Schedule 2 extend the grounds on which an application can be made to the Court for an order declaring that a debt agreement is void to include instances where an administrator: has committed a breach of duty; has breached a condition in an instrument under new subsection 186F(4) or 186G(2B); or has breached a condition imposed under section 20-35 of Schedule 2 of the Bankruptcy Act. These amendments ensure that a debtor can be put into a similar position they would have been had the debt agreement not been entered into. This includes removing the debtor's name from the National Personal Insolvency Index, awarding damages, and declaring that the debtor has not committed an act of bankruptcy. The Court will have the power to make such orders as it sees fit in relation to the debt agreement.

184. Item 22 provides that the amendments made under Part 5 Schedule 2 apply in relation to debt agreements that come into force on or after the commencement of item 22, being immediately after the commencement of Parts 2 to 6 of Schedule 1 (which commence at the end of the period of six months beginning on the day the Amending Act receives the Royal Assent).

Part 6 of Schedule 2 - Debt agreement administrators to refer evidence of offences

Item 23 - At the end of subsection 185LA(1)

185. Section 185LA sets out general duties of an administrator of a debt agreement. These duties include dealing with the debtor's property in the manner specified in the debt agreement, and giving information about the administration of the agreement to the debtor and the creditor(s) in certain circumstances.

186. Under paragraphs 19(1)(h) and (i) a trustee has a duty to consider whether the bankrupt has committed any offences under the Bankruptcy Act and, if so, to refer the conduct to the Inspector-General or to relevant law enforcement authorities. Administrators currently have no similar duty.

187. Item 23 of Part 6 Schedule 2 amends section 185LA to extend the duties of a debt agreement administrator to reflect those conferred on trustees under paragraphs 19(1)(h) and (i) of the Bankruptcy Act. This will improve the integrity of the debt agreement regime and ensure that misconduct is dealt with promptly by the appropriate law enforcement authorities.

Item 24 - Application provision

188. Item 24 provides that the amendments made under Part 6 Schedule 2 apply in relation to debt agreements that come into force on or after the commencement of item 24, where the debt agreement proposals were given on or after that commencement. Item 24 commences immediately after the commencement of Parts 2 to 6 of Schedule 1 (which commence at the end of the period of six months beginning on the day the Amending Act receives the Royal Assent).

Part 7 of Schedule 2 - Reporting requirements for debtors in arrears

Items 25 to 27 - Subsection 185LB(3)

189. Section 185LB provides that the administrator of a debt agreement must notify creditors of a 3 month arrears default by the debtor in certain circumstances. Currently this obligation applies regardless of the amount of the arrears. If the arrears amount is particularly low, the administrative cost of complying with this obligation may exceed the likely benefits.

190. Items 25 to 27 amend subsection 185LB(3) to increase the threshold by which an administrator is obliged to report a 3 month arrears default. Item 27 inserts new subparagraph (c)(i) into subsection 185LB(3) to provide that administrators are only required to report to creditors under 185LB(1) if the value of the arrears exceeds either 20 per cent of the payment due for the period, or $300, whichever is higher.

191. Item 27 inserts new subparagraph 185LB(3)(c)(ii) which provides that the administrator must report the 3-month arrears default if no payment was made in the period to reduce any of the due payments.

192. These amendments ensure that administrators are only required to notify creditors of a 3-month arrears default by a debtor if the amount that the debtor is in arrears is significant having regard to the value of the payments due and the cost of notifying creditors. New subparagraph 185LB(3)(c)(i) stipulates the applicable amount as both a percentage and monetary amount to avoid capturing circumstances which should not be reported.

Item 28 - Application provision

193. Item 28 provides that the amendments made under Part 7 Schedule 2 apply in relation to debt agreements that come into force on or after the commencement of item 28, being immediately after the commencement of Parts 2 to 6 of Schedule 2 (which commence at the end of the period of six months beginning on the day the Amending Act receives the Royal Assent).

Part 8 of Schedule 2 - Alignment of offences

Item 29 - After subsection 185LD(2)

194. Section 185LD requires the administrator to maintain a separate bank account for funds relating to the debt agreement. This enables accounts holding debt agreement moneys to be more readily identified by the Inspector-General in the performance of its regulatory functions. It also assists in the identification of moneys to which each debt agreement applies. Only debt agreement funds may be deposited into this account.

195. Sections 65-5 and 65-15 of Schedule 2 of the Bankruptcy Act contain the equivalent provisions to section 185LD relating to trustees. Building on from this, section 65-25 of Schedule 2 prohibits trustees from paying any money out of the administration account other than for the purposes of administration of the estate, in accordance with the Bankruptcy Act, or by direction of the Court. There is no equivalent to section 65-25 of Schedule 2 which relates to administrators.

196. Item 29 of Part 8 Schedule 2 inserts a new subsection 185LD(2A) which mirrors the prohibitions contained at section 65-25 of Schedule 2. This amendment prohibits debt agreement administrators from paying any money out of the account other than for the purposes of administration of the debt agreement, in accordance with the Bankruptcy Act, or by direction of the Court.

197. These amendments align the bankruptcy and debt agreement regimes and improve the integrity of the debt agreement regime by ensuring that trust accounts are easily identifiable and appropriately regulated.

Item 30 - After section 185LD

198. Section 185LD requires the administrator to maintain a separate bank account for funds relating to the debt agreement. This enables accounts holding debt agreement moneys to be more readily identified by the Inspector-General in Bankruptcy in the performance of its regulatory functions. It also assists in the identification of moneys to which each debt agreement applies. Only debt agreement funds may be deposited into this account.

199. Sections 65-5 and 65-15 of Schedule 2 of the Bankruptcy Act contain the equivalent provisions to section 185LD relating to trustees. Those provisions attach a strict liability offence of 50 penalty units for failure to comply. Currently no strict liability offence applies to administrators who breach section 185LD.

200. Item 30 of Part 8 Schedule 2 inserts a new strict liability offence provision of 50 penalty units, consistent with the provisions relating to trustees at sections 65-5 and 65-15 of Schedule 2, for contravention of established subsections 185LD(1) and 185LD(2), and new subsection 185LD(2A), as inserted by item 29 of Part 8 Schedule 2.

201. The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for individuals who may be accused of breaching such offences.

202. Strict liability offences are appropriate in this area of regulation, as it is necessary to strongly deter misconduct that can have serious consequences for affected parties. Strict liability offences also reduce non-compliance, which bolsters the integrity of the regulatory regime enforced by the AFSA. Strict liability is particularly beneficial to these regulatory bodies as they need to deal with offences expeditiously to maintain public confidence in their regulatory regimes.

203. The strict liability offences in new subsection 185LD(2A) meet all the conditions listed in the Guide to Framing Commonwealth Offences (pages 23 and 24). For example, the fines for the offences do not exceed 60 penalty units for an individual. By providing a strict liability enforcement regime for duties of debt agreement administrators, the Bill significantly enhances the likelihood of compliance by administrators.

204. This amendment aligns the bankruptcy and debt agreement regimes and improves the integrity of the debt agreement regime by ensuring that trust accounts are easily identifiable and appropriately regulated.

Item 31 - After subsection 185LE(1)

205. Subsection 185LE(1) requires a debt agreement administrator to keep sufficient records as are necessary to give a full and correct depiction of the administration of each debt agreement. The subsection also provides the Inspector-General with the power to access the administrator's records and require the administrator to answer an inquiry in relation to a debt agreement, in order to facilitate its regulatory functions pursuant to the Bankruptcy Act.

206. Section 70-10 of Schedule 2 of the Bankruptcy Act contains the equivalent provision to section 185LE relating to trustees' obligation to keep proper books. That provision attaches a strict liability offence of 5 penalty units for failure to comply. Currently no strict liability offence applies to administrators who breach section 185LE.

207. Item 31 of Part 8 Schedule 2 inserts a new strict liability offence provision of 5 penalty units, consistent with the provision relating to trustees at section 70-10 of Schedule 2 of the Bankruptcy Act, for contravention of paragraphs 185LE(1)(a) or 185LE(1)(b).

208. The application of strict liability, as opposed to absolute liability, preserves the defence of honest and reasonable mistake of fact to be proved by the accused on the balance of probabilities. This defence maintains adequate checks and balances for individuals who may be accused of breaching such offences.

209. Strict liability offences are appropriate in this area of regulation, as it is necessary to strongly deter misconduct that can have serious consequences for affected parties. Strict liability offences also reduce non-compliance, which bolsters the integrity of the regulatory regime enforced by the AFSA. Strict liability is particularly beneficial to these regulatory bodies as they need to deal with offences expeditiously to maintain public confidence in their regulatory regimes.

210. The strict liability offences in new subsection 185LE(1A) meet all the conditions listed in the Guide to Framing Commonwealth Offences (pages 23 and 24). For example, the fines for the offences do not exceed 60 penalty units for an individual. By providing a strict liability enforcement regime for duties of debt agreement administrators, the Bill significantly enhances the likelihood of compliance by administrators.

211. This amendment aligns the bankruptcy and debt agreement regimes and improves the integrity of the debt agreement regime by ensuring that records of trust accounts are correct, which will assist the Inspector-General in Bankruptcy in administrating the regulatory functions under the Bankruptcy Act.

Item 32 - Subsection 277B(2) (after table item 5)

212. Section 277B provides that as an alternative to prosecution, a penalty of an amount set out in the table contained in subsection 277B(2), can be imposed through an infringement notice.

213. New subsection 185LE(1A), inserted by item 31 of Part 8 Schedule 2, provides that a debt agreement administrator commits an offence if they fail to keep sufficient records and make the records available for audit under section 185LE.

214. Item 32 of Part 8 Schedule 2 inserts a new provision into the table contained in subsection 277B(2) which provides that a breach of new subsection 185LE(1A) can, where appropriate, be addressed by way of infringement notice with an amount payable to the value of 1 penalty unit.

215. This amendment aligns with the penalty amounts set out for the equivalent of section 185LE relating to trustees contained at sections 70-10 and 70-25 of Schedule 2 of the Bankruptcy Act. Those provisions also allow an offence can be addressed by way of infringement notice with a value of 1 penalty unit.

Item 33 - Application provisions

216. Item 33 sets out the application provisions for amendments to the Bankruptcy Act made under Part 8 Schedule 2.

217. The amendments to subsection 185LD(2A) (item 29 of Part 8 Schedule 2 - prohibiting money to be paid out of the trust account in certain circumstances) will apply in relation to debt agreement proposals that come into force on, after, or were in force immediately before commencement of item 33, being immediately after the commencement of Parts 2 to 6 of Schedule 2 (which commence at the end of the period of six months beginning on the day the Amending Act receives the Royal Assent). Accordingly, a debtor breaches a duty under new subsection 185LD(2A) regardless of whether the debt agreement came into force after commencement of item 33, or was in force immediately before commencement (even if the breach took place before commencement of item 33). The retrospective application of this duty reflects the seriousness of breaching it.

218. The amendments to section 185LDA (item 30 - creating an offence for breach of duties relating to the trust account) will apply in relation to money received on or after commencement of item 33. The new offence relating to subsection 185LD(2A) will only apply to money paid out of the account on or after the commencement of item 33. Accordingly, an administrator that breaches the duty under new subsection 185LD(2A) for an act committed before commencement of item 33, does not commit an offence under new section 185LDA.

219. New subsection 185LE(1A) (item 31 - creates an offence against administrators for failing to keep sufficient records) will apply in relation to debt agreements that come into force on or after the commencement of item 33.

Part 9 of Schedule 2 - Time for submitting annual returns

Item 34 - Subsection 185LEA(1)

220. Every year an administrator must prepare and submit to the Inspector-General an annual return which collates and details information on active debt agreements managed by the administrator. The annual return is intended to inform the AFSA's report to Parliament on the operation of the Bankruptcy Act. Under paragraph 12(1)(d), AFSA must report on the operation of the Bankruptcy Act after the financial year. In practice, AFSA integrates this report into its annual report. Section 46 of the Public Governance, Performance and Accountability Act 2013 states that government agencies, such as AFSA, must submit annual reports by 15 October.

221. Subsection 185LEA(1) states that an administrator must submit an annual return to the Inspector-General within 35 days after the financial year. Paragraph 70-5(3)(b) of Schedule 2 of the Bankruptcy Act states that the corresponding deadline for registered trustees is 25 business days. While 35 days and 25 business days denote a similar timeframe, the inconsistency hinders AFSA's collection and processing functions.

222. Item 34 of Part 9 Schedule 2 amends subsection 185LEA(1) so that the applicable deadline for annual return submission is 25 business days after the financial year. This ensures consistency between the deadlines for trustee and debt agreement administrator annual returns and assists AFSA to perform its regulatory functions.

Item 35 - Application provision

223. The amendments made by Part 9 of Schedule 2 apply in relation to financial years ending after the commencement of item 35, being immediately after the commencement of Parts 2 to 6 of Schedule 2 (which commence at the end of the period of six months beginning on the day the Amending Act receives the Royal Assent).