Explanatory Statement

Issued by the Authority of the Attorney-General

EXPLANATORY STATEMENT

Bankruptcy Act 1966

Subsection 315(1) of the Bankruptcy Act 1966 (the Act) provides that the Governor-General may make regulations prescribing matters required or permitted by the Act to be prescribed or necessary or convenient to be prescribed for carrying out or giving effect to the Act.

The purpose of the Regulations is to amend the Bankruptcy Regulations 1996 (the Principal Regulations) to respond to concerns raised by stakeholders in relation to debt agreements and personal insolvency agreements established under Parts IX and X of the Act respectively. The Regulations would also remove the discretion conferred by the Principal Regulations on the Inspector-General in Bankruptcy to waive or remit a fee payable to the Official Trustee in Bankruptcy.

The Regulations would:

•

improve the accountability of the administrators of debt agreements for money received in the course of administering the agreement;

•

modify the application of the meeting provisions of the Act to streamline giving notice of, and providing documents for, a creditors' meeting that is called under Part X of the Act;

•

modify the application of the disclosure requirements in instruments of proxy used in meetings called under pre or post bankruptcy arrangements with creditors;

•

enable the National Personal Insolvency Index to record the reason for a debt agreement or personal insolvency agreement coming to an end;

•

remove the discretion held by the Inspector-General in Bankruptcy to waive or remit a fee payable to the Official Trustee in Bankruptcy; and

•

make other minor and technical amendments including updating legislative references.

Details of the Regulations are provided in the Attachment .

The Regulations would be a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Regulations would commence on the day after their registration on the Federal Register of Legislative Instruments.

Nature of Consultation

Where appropriate, the Bankruptcy Reform Consultative Forum is consulted on amendments to bankruptcy legislation. The Forum comprises representatives from the Finance Industry, Financial Counselling Services, Banking sector, Government, the Law Council and the Insolvency Practitioners of Australia (IPAA). The Forum was consulted on the above amendments except those relating to minor and technical changes which do not change the law or policy, including the matters to be recorded on the National Personal Insolvency Index.

In relation to the amendments related to debt agreement administrators, Debt Agreement Administrators were also asked for their views.

Amendments relating to the increased disclosure proxy requirements and new arrangements for providing notice of the first creditors' meetings were made in response to concerns about former regulations implemented (in 2004) as a result of the review of Part X of the Bankruptcy Act 1966. The increased proxy disclosure amendments are intended to more fully address the mischief of proxy purchasing identified in the Part X review. The IPAA were consulted on the new arrangements to provide notice of the first creditors meeting.

ATTACHMENT

Details of the proposed Bankruptcy Amendment Regulations 2006 (No. 1)

Regulation 1 - Name of Regulations

This regulation provides that the title of the Regulations is the Bankruptcy Amendment Regulations 2006 (No. 1).

Regulation 2 - Commencement

This regulation provides for the Regulations to commence on the day after they are registered.

Regulation 3 - Amendment of Bankruptcy Regulations 1996

This regulation provides that Schedule 1 to the Regulations amends the Bankruptcy Regulations 1996 (the Principal Regulations).

Regulation 4 - Application- debt agreements

This regulation provides that the amendment made by item [5] of Schedule 1 applies in relation to a debt agreement, the debt agreement proposal for which is given to the Official Receiver on or after 1 May 2006.

Regulation 5 - Transitional- waiver and remission of fees

Section 163 of the Bankruptcy Act 1966 (the Act) provides that the Official Trustee in Bankruptcy (the Official Trustee) is to be remunerated as prescribed by the Principal Regulations. Subdivision 2.2 of Part 16 of the Principal Regulations prescribes the fees that are the remuneration of the Official Trustee. Subdivision 2.4 of Part 16 of the Principal Regulations, comprising regulations 16.13A and 16.13B, deals with the waiver and remission by the Inspector-General of fees payable under the Act and Principal Regulations.

Regulation 16.13A of the Principal Regulations enables the Inspector-General to waive or remit the whole of part of any fee, including the fees payable to the Official Trustee under Subdivision 2.2 of Part 16 of the Principal Regulations. Regulation 16.13B provides for administrative review of a decision made by the Inspector-General under regulation 16.13A.

Item 10 of Schedule 1 to these Regulations amends regulation 16.13A having the effect of removing the Inspector-General's ability to waive or remit a fee payable to the Official Trustee under Subdivision 2.2 of Part 16 of the Principal Regulations.

Item 11 of Schedule 1 provides for administrative review of the Inspector-General's decisions made under new regulation 16.13A and rewrites regulation 16.13B of the Principal Regulations using contemporary drafting without any change in its effect.

These amendments would enable the Inspector-General to waive or remit fees that became payable to the Official Trustee under Subdivision 2.2 of Part 16 of the Principal Regulations before the commencement of these Regulations. It would also retain a right of administrative review for those decisions and for decisions made before the commencement of these Regulations if the time within which that decision may be reviewed has not ended.

New subregulation 5(1) would have the effect that the Inspector-General's capacity to waive or remit a fee before commencement of these Regulations, and the related right of administrative review, applies despite the amendments proposed by items 10 and 11 of Schedule 1.

New subregulation 5(2) provides that the Inspector-General may waive or remit the whole or part of any fee that became payable under Subdivision 2.2 of Part 16 of the Principal Regulations before the commencement of these Regulations if he or she is reasonably satisfied that payment of the fee by the person liable to pay it has imposed, or would impose, undue hardship on the person or because of other exceptional circumstances, it is proper or reasonable to do so. This subregulation corresponds to subregulations 16.13A(1) and (2) of the Principal Regulations.

New subregulation 5(3) provides that the term 'undue hardship' in paragraph 2(a) means hardship that is unusual and exceptional in comparison to the hardship arising in the normal course of bankruptcy. This subregulation corresponds to subregulation 16.13A(3) of the Principal Regulations.

New subregulation 5(4) provides that a decision under subregulation (2) must be notified in writing to the person concerned and the Official Trustee.

New subregulation 5(5) provides for review by the Administrative Appeals Tribunal of the Inspector-General's decision made in respect of any fee that became payable under Subdivision 2.2 of the Principal Regulations before the commencement of these Regulations. This subregulation corresponds to subregulation 16.13B of the Principal Regulations.

New subregulation 5(6) provides for administrative review of the Inspector-General's decision made before the commencement of these Regulations if the time within which that decision may be reviewed has not ended.

New subregulation 5(7) would allow a person to whom the Inspector-General has delegated, immediately before the commencement of these regulations, the power to waive or remit a fee in subregulation 16.13A(1) of the Principal Regulations to exercise the power in subregulation (2).

Regulation 6 - Application- notice of first meeting of creditors

This regulation provides that the amendment made by items [12] and [14] of Schedule 1 to these Regulations applies in relation to a notice of the first meeting of creditors given on or after 3 April 2006.

Schedule 1 Amendments

[1] Subregulation 1.03(1), after definition of Criminal Code

This item inserts two new definitions referring respectively to the Federal Court (Bankruptcy) Rules 2005 and the Federal Magistrates Court (Bankruptcy) Rules 2006. The new definitions are necessary to update legislative references in Schedule 8.

[2] Regulation 4.02A

This item inserts new regulation 4.02A to omit the provisions dealing with bankruptcy notices that had been issued under Bankruptcy Rules, now repealed. New regulation 4.02A provides for the service of bankruptcy notices issued under the Act.

[3] Regulation 8.37

This item corrects a minor typographical error by inserting the word 'as' between 'act' and 'a'.

[4] Paragraph 9.06(1)(e)

This item makes a drafting change to enable the inclusion of proposed paragraph 9.06(1)(f) (see item 5 below) after paragraph 9.06(1)(e).

[5] After paragraph 9.06(1)(e)

Subregulation 9.06(1) of the Principal Regulations imposes a number of duties on the administrator of a debt agreement. Subregulations 9.06(2), (3) and (4) allow the Inspector-General to determine that an administrator has failed to properly carry out those duties. Paragraph 9.04(1)(f) provides that a person is ineligible to act as an administrator if the Inspector-General has determined under regulation 9.06 that the person has failed to properly carry out those duties.

This item would impose additional duties on administrators who are remunerated under the debt agreement. The additional duties are to maintain a separate record, in relation to the debt agreement, of receipts and payments, and of the balance of money held by the administrator; to pay all money received on account of the debt agreement into a single interest-bearing bank account that holds money relating only to debt agreements; and, at least once every 45 days, reconcile the balance held in that bank account with the corresponding record.

A note refers to sections 185Z and 185ZD of the Act which provide for the remuneration of an administrator (other than the Official Trustee) of a debt agreement.

[6] Subregulation 10.03(2), including the notes

Regulation 10.03 of the Principal Regulations deals with the documents that must be provided to the Official Receiver for the purposes of recording the existence of an authority given under section 188 in Part X of the Act, on the National Personal Insolvency Index (NPII). In addition to signed consent from the registered trustee or solicitor, a copy of the proposal for dealing with the debtor's affairs under Part X of the Act is provided to the Official Receiver.

The copy of the proposal is unnecessary for the purposes of recording the existence of a section 188 authority on the NPII. Rather, the copy of the proposal should be provided to creditors in anticipation of the meeting that is held under section 188 (see below at item 8). This item inserts new subregulation 10.03(2) which provides that the registered trustee or solicitor must, within 2 working days of consenting, give (only) a copy of the signed consent to the Official Receiver for the District in which the debtor resides. This is a minor technical change to streamline the provisions requiring the documents to be provided to the Official Receiver and other persons.

A note refers to the requirement for other documents to be provided to the Official Receiver. Under subsection 188(5) of the Act, a registered trustee or solicitor who consents to exercise the powers given by an authority must also give to the Official Receiver for the District in which the debtor resides, a copy of the authority and the debtor's statement of affairs.

[7] Regulation 10.04

This item inserts new wording before paragraph (a) in regulation 10.04. Former regulation 10.04 required the documents listed in paragraphs (a) to (f) to be provided to the persons at least 10 days before the first meeting of creditors was called under an authority under section 188 of the Act. It was unclear if the reference to 'called' referred to the actual meeting or to the date of giving notice of the meeting. New regulation 10.04 clarifies that the documents set out in paragraphs (a) to (f) should be provided to the Official Receiver, debtor and each creditor at least 10 days before the meeting is actually held.

[8] After paragraph 10.04(a)

Regulation 10.04 deals with the documents to be provided to the Official Receiver, the debtor and each creditor in anticipation of holding a first creditors meeting called under an authority under section 188. This item inserts new paragraph (aa) to regulation 10.04 to include a copy of the proposal given by the debtor under subsection 188(2C) of the Act for dealing with the debtor's affairs under Part X of the Act. This is to be provided to the Official Receiver, debtor and each creditor. This is a minor technical change to streamline the provisions requiring the documents to be provided to the Official Receiver and other persons.

[9] After subregulation 16.06(2)

Regulation 16.06 of the Principal Regulations prescribes an hourly rate for some tasks undertaken by the Official Receiver, and provides that the fee be paid in advance. It is often difficult for the Official Receiver to know in advance how long the task will take. Therefore, it is not possible to determine the amount of the fee payable until the task is completed.

This item inserts new subregulation 16.06(3) which provides that prior payment of a fee is not required if the Inspector-General has approved an alternative arrangement for payment of the fee. An example is provided of an alternative arrangement such as where the Inspector-General may have approved an arrangement under which fees payable by a registered trustee may be paid monthly in arrears.

Under the proposed amendments, the fees payable would continue to be based on the statutory scale. The alternative arrangements for payment would only relate to the timing of payments.

[10] Subregulation 16.13A(5)

Regulation 16.13A of the Principal Regulations enables the Inspector-General to waive or remit a fee payable under a provision, other than fees payable to the Official Receiver under regulation 16.04. The Inspector-General's discretion extends to the fees payable as the Official Trustee's remuneration and which are set out in Subdivision 2.2 of Part 16 of the Principal Regulations.

The Inspector-General may waive or remit the fee if he is reasonably satisfied that payment of the fee by the person liable to pay it has imposed or would impose undue hardship on the person or because of other exceptional circumstances, it is proper and reasonable to do so. 'Undue hardship' is defined to mean hardship that is unusual and exceptional in comparison with hardship arising in the normal course of bankruptcy. Regulation 16.13B provides for the Administrative Appeals Tribunal to review the Inspector-General's decisions.

The Tribunal has decided that hardship or exceptional circumstances is not limited to financial matters. The Tribunal has waived the fee (on appeal from a decision by the Inspector-General) in cases where the additional money would alleviate the bankrupt's difficult personal circumstances - such as very poor health or difficult family issues.

In practice, this provision represents a contradiction and lacks logic. Under bankruptcy law and practice, it is creditors who effectively meet the trustee's fees and other costs of administering the estate (fees and other costs are paid from the estate and the balance is paid to creditors as dividends). The only time that a bankrupt is affected is when there is a surplus in the estate. So the provision has the effect of regarding bankrupts whose estates have sufficient property to fully pay creditors as having hardship, while bankrupts whose estates have insufficient property to pay creditors are not regarded as being in hardship.

This item inserts a new definition of 'fee' in subregulation 16.13A(5) of the Principal Regulations. The effect of the new definition is that the Inspector-General will be unable to waive or remit fees payable to the Official Trustee under Subdivision 2.2 of Part 16 of the Principal Regulations.

[11] Regulation 16.13B

16.13B Review by AAT of decision of Inspector-General

This item rewrites regulation 16.13B of the Principal Regulations using contemporary language without any change in its effect. New regulation 16.13B establishes a right of administrative review for decisions made by the Inspector-General relating to the waiver or remission of a fee.

A note refers to section 27A of the Administrative Appeals Tribunal Act 1975, which requires the decision-maker to give any person whose interests are affected by the decision, notice in writing or otherwise, of the making of the decision and of the person's right to have the decision reviewed. The note mentions that, in giving that notice, the decision-maker must have regard to the Code of Practice determined under section 27B of that Act (Gazette No. S 432, 7 December 1994).

Amendments to Schedules 2 and 6

Division 6 of Part IV of the Act provides for post-bankruptcy arrangements with creditors. Part X of the Act provides for a debtor's voluntary arrangement with creditors without undergoing bankruptcy. Both Division 6 and Part X arrangements require meetings of creditors to decide on whether they will accept the bankrupt's or debtor's proposal. Division 5 of Part IV of the Act deals with procedures for meetings of creditors. The Principal Regulations provide modifications of Division 5 of Part IV of the Act to enable their application to Part X and post bankruptcy compositions or scheme.

Given that similar issues may arise in meetings called under Division 6 post-bankruptcy arrangements with creditors and a debtor's Part X arrangements, the amendments to modify the meetings procedures are applied to each of those administrations.

Section 76A provides that Division 5 of Part IV applies, as far as it is capable and with any modifications prescribed by the Regulations to a meeting of creditors called under Division 6 of Part IV of the Act. Regulation 4.19 provides that Division 5 of Part IV is modified in accordance with Schedule 2 in relation to meetings of creditors under Division 6 of Part IV. Items 12 and 13 amend Schedule 2 to the Principal Regulations.

Section 196 of the Act provides that Division 5 of Part IV applies, as far as it is capable and with any modifications prescribed by the Regulations to a meeting of creditors called under section 188 authorities. Regulation 10.05 of the Principal Regulations provides that the modifications are set out in Part 2 of Schedule 6 of the Principal Regulations. Items 14 and 15 amend Part 2 of Schedule 6 to the Principal Regulations

[12] Schedule 2, item 1A

Insolvency practitioners have criticised the requirement that the controlling trustee advertise creditors' meetings in national and regional newspapers. That requirement is found in item 1A of Schedule 2 to the Principal Regulations which modifies section 64A of the Act to provide for persons to whom the notice of meeting is to be given.

Insolvency practitioners have suggested that trustees should be required to enter information about the first creditors' meeting into a website, which would be available to the general public.

To provide greater flexibility in the capacity for providing public notice of the first creditors' meeting, the Inspector-General would be able to approve the manner in which public notice is given of that meeting. An example might be a website that was designed for that purpose which was accessible to creditors and which met other requirements. There would also be no requirement to advertise second and later meetings.

This item inserts new items 1AA, 1AB and 1AC to Schedule 2.

New item 1AA substitutes new subsection 64A(2) to provide that notice of a first meeting must be published in a manner approved by the Inspector-General and that notice for any other meeting of creditors, must be given in a manner specified in the regulations. New subsection 64A(2) is applied to Part X meetings by item 14 which amends Schedule 6, Part 2, item 3.

New item 1AB provides for new subsections 64A(3) to (5). New 64A(3) provides that the notice of the first meeting of creditors must include any matter approved by the Inspector-General. New subsection 64A(4) provides that for the purposes of publishing the approved manner of notification of the first creditors' meeting, he or she may approve, as the manner of publication of the notice of the first meeting of creditors, publication on a website. The Inspector-General may specify in the approval the website where the notice must be published and any conditions relating to the approval.

An example illustrates the operation of new subsection 64A(4). The Inspector-General may specify the format of the notice, the period of time for which the notice must remain on the website and whether related documents are to be made available for downloading from the website or in hard copy.

New subsection 64A(5) provides that an approval made by the Inspector-General for the purposes of paragraph (2)(a) or subsection (3) must be published on the Insolvency and Trustee Service Australia's website.

New subsections 64A(3) to (5) are applied to Part X meetings in amendments made by item 14 of these Regulations which inserts Schedule 6, Part 2, item 3A.

New item 1AC inserts new section 64AA which provides immunity from civil actions and proceedings to a person who operates a website that has been approved by the Inspector-General to provide public notice of the first creditors' meeting, if the publication was made in good faith and without negligence. The provision does not affect any other ground of defence.

New section 64AA is applied to Part X meetings in amendments made by item 14 of these Regulations which inserts Schedule 6, Part 2, item 3B.

[13] Schedule 2, item 11A

This item substitutes new item 11A to insert new subsection 64ZC(5A) which amends the information to be included in an instrument appointing a proxy.

The modifications made by the current item 11A as they apply to meetings held under Division 6 of Part IV of the Act required a proxy holder to disclose whether or not he or she has received a financial incentive to vote in a particular way at a creditor's meeting. A corresponding requirement was found in item 15, Part 2 of Schedule 6 as they applied to meetings called under authorities under section 188.

In requiring the proxy (holder) to disclose whether they have received a financial incentive, the provision did not address the mischief of proxy purchasing which occurs when a debtor or creditor provides a financial incentive to another creditor so that they will appoint a proxy who will cast their vote in the desired way.

This item inserts new item 11A and modifies section 64ZC to include new subsection 64ZC(5A). That new subsection provides that a creditor (who appoints the proxy) is required to disclose whether or not they have received, or will receive, a financial incentive either to direct the proxy's vote in a particular way, or to appoint the proxy. The proxy or creditor who appointed the proxy, will also be required to disclose the amount of the financial incentive and who provided, or will provide, the incentive.

New subsection 64ZA(5) is applied to Part X meetings by item 15 which amends Schedule 6, Part 2, item 15.

[14] Schedule 6, Part 2, item 3

The amendments made by this item correspond to the amendments made by item 12 above when they apply to Part X meetings. This item inserts new items 3, 3A and 3B. New items 3 and 3A deal with the notice of the first meeting of creditors and new item 3B provides immunity to the person who operates the approved website from civil actions and proceedings.

[15] Schedule 6, Part 2, item 15

The amendments made by this item correspond to the amendments made by item 13 above when they apply to Part X meetings. This item inserts new item 15 which modifies section 64ZC to include new subsection 64ZC(5A).

Amendments to Schedule 8

Schedule 8 of the Principal Regulations sets out the information that is recorded on the National Personal Insolvency Index (NPII). Subregulation 13.03(1A) of the Principal Regulations provides that in relation to the matters set out in Schedule 8, a document described in an item must be given to the Official Receiver by the person mentioned in column 4 of the item in the period mentioned in column 5. The following items make amendments to Schedule 8 to the Principal Regulations.

[16] Schedule 8, item 12

This item substitutes new item 12 which omits incorrect legislative references.

[17] Schedule 8, item 15, columns 4 and 5

This item updates the legislative references at columns 4 and 5. The FC (Bankruptcy) Rules and FMC (Bankruptcy) Rules are defined at new subregulation 1.03(1).

[18] Schedule 8, item 22, column 6

This item omits from item 22 the requirement to record the date of the end or termination of a debt agreement under any of sections 185N to 185R of the Act. The difficulty with the existing item is that the NPII does not indicate under which of these sections the debt agreement came to an end or terminated.

[19] Schedule 8, after item 22

This item inserts new items 22A, 22B, 22C and 22D. These items require the NPII to indicate under which of sections 185N to 185QA the debt agreement came to an end or terminated.

[20] Schedule 8, item 23, column 4

This item amends item 23 to clarify that all applicants for a court order voiding a debt agreement must advise the Official Receiver of the application and updates the legislative reference. Currently, only creditors and debtors who apply for an order are obliged to notify the Official Receiver of the application.

[21] Schedule 8, item 23, column 5

This item amends column 5 to update the legislative reference which provides the time period within which the applicant who obtained a court order voiding a debt agreement must provide the order to the Official Receiver.

[22] Schedule 8, item 26, columns 4 and 5

This item omits incorrect legislative references.

[23] Schedule 8, item 28C, column 5

This item updates the legislative references that provide for the period within which the registered trustee is required to provide the Official Receiver with a copy of the court order setting aside or terminating the personal insolvency agreement.

[24] Schedule 8, after item 28C

If a trustee is satisfied that all the obligations of the personal insolvency agreement have been discharged, on request by the debtor, section 232 of the Act requires the trustee to give a debtor a certificate signed by the trustee to that effect. Subregulation 10.14(4) of the Principal Regulations obliges the trustee to give a copy of the certificate to the Official Receiver.

This item inserts new item 28D into Schedule 8 requiring the NPII to record that the trustee has given the certificate to the debtor and the date on which the trustee signed the certificate.

[25] Schedule 8, item 30, column 5

This item updates the legislative references that provide for the period within which the petitioning creditor is to provide the court order to the Official Receiver.

[26] Schedule 8, item 32, column 4

This item updates the legislative references that require the applicant to provide the court order to the Official Receiver.

[27] Schedule 8, item 32, column 5

This item updates the legislative references that provide for the period within which the applicant is to provide the court order to the Official Receiver.

[28] Schedule 8, item 33, columns 4 and 5

This item omits incorrect legislative references.