House of Representatives

Explanatory Memorandum

(Circulated by authority of the Attorney-General, the Honourable Daryl Williams AM QC MP)

Section 2 - Policy objectives

Official Receiver's discretion to reject a debtor's petition

36 There has never been an insolvency test for petitioning debtors and this basic principle will remain largely undisturbed by the Bill. However, some debtors petition for bankruptcy for the wrong reasons: their petitions are an abuse of laws intended to protect debtors who cannot pay their debts, and to give them a fresh start.

37 Accordingly, in quite limited circumstances, Official Receivers will be able to reject a debtor's petition. The Bill proposes that, where it appears to the Official Receiver, from information in the statement of affairs (or from other information supplied by the debtor) that, if the debtor did not become a bankrupt, the debtor would be likely to be able to pay the debts, within a reasonable time, the Official Receiver may reject the petition.

38 However, the discretion can only be exercised if, in addition to the above:

(a)

it is evident to the Official Receiver that the debtor is petitioning because of an unwillingness (and not an incapacity) to pay; or

(b)

the debtor has been bankrupt previously, on his or her own petition, either at least three times in all or at least once in the last 5 years.

39 This measure is directed only at the most blatant abuses of the system. It is not envisaged that any petition will be rejected under this proposed measure without personal or telephone contact first being made with the debtor by senior, experienced ITSA staff.

40 Importantly, the Bill proposes that the Official Receiver will not be bound in every instance to consider whether to exercise the discretion. This means that, as now, the vast majority of petitions will be accepted without any enquiry into the debtor's solvency.

41 A debtor whose petition is rejected through the exercise of the Official Receiver's discretion will be able to have that decision reviewed by the Administrative Appeals Tribunal (the AAT.)

Abolition of early discharge

42 The Bill proposes the abolition of the early discharge provisions of the Act. These provisions are most often cited as the cause of concern that bankruptcy is too easy. The reduced period of bankruptcy is seen to discourage debtors from trying to enter formal or informal arrangements with their creditors to settle debts, and provides little opportunity for debtors to become better financial managers.

43 Also, when introduced, early discharge was described as applying to those whose bankruptcy was brought about by 'misfortune' rather than 'misdeed'. The provisions were targeted at a new category of bankrupt - consumer debtors with low asset-backing who over-extend and then cannot repay their debts. However, they have not achieved their stated intent. There is no evidence that qualifying for early discharge is a sound measure of whether a bankruptcy has been due to misfortune rather than misdeed.

44 There is no intrinsic reason why bankrupts who have assets available for distribution or income sufficient to make a contribution to the estate (which disqualifies them for early discharge) are less worthy of early discharge than those who do not. In addition, allowing only those whose debts exceed 150% of income to apply, discriminates against women who have joint debts with, and generally a lower income than, their spouse. In other words, the provisions operate in quite discriminatory ways.

Objection-to-discharge provisions strengthened

45 The objection-to-discharge provisions allow bankruptcy trustees to lodge an objection to the bankrupt's automatic discharge at the end of the 3 year standard period of bankruptcy. Depending on the grounds of objection, the standard bankruptcy period can be extended by 2 years or, in more serious cases, by 5 years.

46 Under the present regime a notice of objection must set out the ground(s) of objection, refer to the evidence that, in the trustee's opinion, establishes the ground(s) and state the trustee's reasons for objecting to discharge on the ground(s) specified in the notice.

47 In practice, trustees often have found it difficult to maintain objections. Frequently, objections have been cancelled on review by the Inspector-General, the Administrative Appeals Tribunal (AAT) or the Federal Court. The reasons for cancellation vary. Some trustees have found it difficult to differentiate clearly the ground(s) of an objection and the reason for filing the objection. Moreover, on occasions, the AAT has upheld a bankrupt's challenge to an objection simply because, either during an AAT hearing or just before it occurs, the bankrupt eventually has provided information long sought by the trustee and the non-supply of which information was the ground of the trustee's objection. Such decisions undermine a prime purpose of the objection regime which is to induce a bankrupt to cooperate, promptly, with the trustee of the bankrupt estate.

48 The Full Federal Court decision in Inspector-General in Bankruptcy v Nelson (1998)
168 ALR 340 establishes that a sufficient reason for filing an objection under the current provisions is that doing so will advance the trustee's administration of the bankrupt estate. However, conversely, punishment of the bankrupt for failure to cooperate was found to be an impermissible reason for filing an objection.

49 To address these deficiencies in the present law which have hampered a trustee's capacity to elicit cooperation from some bankrupts, and to strengthen the trustee's hand, the Bill proposes a tougher objection-to-discharge regime under which it is expected that more objections will withstand the review process.

50 It is proposed that trustee objections will fall into one of two groups, namely, those which specify at least one 'special ground' and those which specify none. In the first group, the trustee's notice of objection still will have to set out the ground(s) of objection and the evidence relied on to establish it or them, but need not state the reasons for filing an objection to the bankrupt's discharge from bankruptcy. For objections which contain no 'special ground', the trustee will be obliged, as now, to provide in the notice the trustee's reasons for filing an objection.

51 The existing objection grounds in paragraphs 149D(1)(d) to (h) inclusive will now constitute special grounds, as will those in proposed new paragraphs 149D(1)(ab), (da), (ha) and (ma). The existing objection grounds in paragraphs 149D(1)(a), (b) and (h) to (n) inclusive will constitute other grounds, as will the ground in proposed new paragraph 149D(1)(aa). Special grounds are directed at deliberate actions by the bankrupt to defeat creditors or to hinder the trustee's administration. The bankrupt's pre-objection conduct, rather than the trustee's capacity to show that an objection will advance the conduct of the administration, will determine whether any notice of objection will have to state the reason(s) why it has been lodged. Examples of special grounds that may be listed in an objection notice and regarding which no reasons are required include:

(a)

any transfer is void against the trustee in the bankruptcy because of section 121 (ie, the section which deals with property transfers to defeat creditors) (proposed new paragraph 149D(1)(ab)); and

(b)

after the date of the bankruptcy, the bankrupt intentionally provided false or misleading information to the trustee (proposed new paragraph 149D(1)(da)) .

52 Proposed new subsection 149N(1A) identifies the special ground paragraphs. As noted, they relate to deliberate actions which can disrupt a trustee's administration or which are intended to defeat creditors. While it can be difficult to infer intention, in each instance the burden of proof which the trustee will bear if an objection is challenged is the civil onus, ie, proof on the balance of probabilities.

53 Further, by proposed subsection 149N(1B), a reviewer will not be able to cancel an objection by taking into account any conduct of the bankrupt after the time when the ground first commenced to exist. Objections on special grounds will be reviewable only as to whether the ground(s) and evidence are made out, unless the reviewer is satisfied by the bankrupt that the facts supporting the objection arose without any fault on the bankrupt's part.

54 While a trustee's hand is strengthened greatly by the proposed new provisions, it remains the case that a trustee does not have to file an objection unless subsection 149B(2) applies, and a trustee can cease to object on a particular ground (section 149H) or withdraw an objection at any time (section 149J).

Annulment of bankruptcy by Court whether or not petitioning debtor insolvent

55 Section 153B of the Act gives the Court power to annul a bankruptcy if it is satisfied that a petition ought not to have been presented. The Bill proposes an amendment to make clear that the Court can so decide, even if the debtor is insolvent.

56 High-income debtors who are maintaining an expensive lifestyle and petition for bankruptcy with the aim of avoiding paying a particular creditor (eg, the ATO) will be among those targeted by this proposed amendment. If the Court believes that the debtor could make arrangements to pay the creditor it could annul the bankruptcy as an abuse of process.

Raising by 50% the current income threshold for debt agreements

57 Debt agreements were introduced in 1996 as a low-cost alternative to bankruptcy, available to low-income debtors with assets and debts below specified thresholds. Debtors cannot access the provisions if they have an after-tax income of more than $31,176 (if there are no dependants) and either their assets or debts exceed $62,352 (these are January 2002 figures, and are subject to 6-monthly indexation). The comparatively low income threshold has been criticised as denying the debt agreement alternative to a group of debtors whose circumstances would be well suited to it.

58 It has been noted that debtors who were 'too poor' to be required, under one Part of the Act, to make contributions from income for the benefit of their creditors were nonetheless invited, under another part of the Act, to make a debt agreement proposal to creditors. Despite this criticism, 2,320 debt agreement proposals were lodged with ITSA for processing in 2000-01. Raising the threshold by 50% will increase substantially the number of debtors who will be able to make a debt agreement proposal to their creditors as an alternative to bankruptcy. It is consistent with an important theme of the reform measures - to encourage debtors to consider the alternatives seriously before choosing bankruptcy.