Senate

Replacement Explanatory Memorandum

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

Schedule 1 - Debt agreement proposals

AMENDMENTS TO THE BANKRUPTCY ACT 1966

GENERAL OUTLINE

34. Five schedules are included with the Bill. The amendments in Schedule 1 will modify the requirements for, and treatment of, debt agreements proposals.

35. These amendments include: limiting the types of practitioners authorised to be debt agreement administrators, the types of information the debtor must record in a debt agreement proposal, the certifications the proposed administrator must make, and the standards for how the Official Receiver must handle proposals.

Part 1 of Schedule 1 - Persons who may be authorised to deal with debtor's property

Division 1 - Main amendments

Items 1 and 2 - Subsection 185C(2)

36. Subsection 185C(2) currently sets out the requirements for a debt agreement proposal. Under current paragraph 185(2)(c), a debt agreement proposal must authorise the Official Trustee, a registered trustee or another person to administer the debt agreement. Due to the effect of current subsections 185E(1), 185E(2A), 185(2B) and 1852(C), a debtor or other person who is not a registered debt agreement administrator or registered trustee, is able to administer a debt agreement if they pass the basic eligibility test under section 186A and are not administering more than 5 debt agreements at a time.

37. The purpose of the registration system is to ensure that debt agreement administrators have the knowledge, skills and attributes to professionally undertake their role. Allowing unregistered administrators to manage debt agreements, even it is their own debt agreement, undermines the integrity of the system and ultimately has the potential to cause further undue financial hardship to debtors.

38. Item 1 amends paragraph 185C(2)(c) so that only a registered debt agreement administrator, registered trustee or the Official Trustee can be authorised to administer a debt agreement.

39. Item 2 adds a note to subsection 185C(2) to clarify that that a debtor cannot be authorised to administer their own debt agreement unless they are a registered debt agreement administrator or registered trustee.

Item 3 - Subsections 185E(1), (2A), (2B) and (2C)

40. The requirements for a debt agreement proposal, as set out in subsections 185C(2), 185(2A), 185(2B) and 185(2C), currently allow for a debtor or other person who is not a registered debt agreement administrator or registered trustee to administer a debt agreement if they pass the basic eligibility test under section 186A, and are not administering more than 5 debt agreements at a time. This includes debtors self-administering their own debt agreements.

41. To ensure that debt agreement administrators have the knowledge, skills and attributes to professionally undertake their role, items 1 and 2 of Part 1 Schedule 1 amend subsection 185C(2) so that only a registered debt agreement administrator, registered trustee or the Official Trustee can be authorised to administer a debt agreement.

42. Subsection 185E(1) currently requires the Official Receiver to give the debtor prescribed information if the debtor is self-administering their debt agreement. Under the amendments at items 1 and 2 of Part 1 Schedule 1, the only debtors that can be authorised to self-administer their debt agreements will be registered debt agreement administrators or registered trustees.

43. As the registration system mandates having the requisite knowledge, skills and attributes to professionally undertake the role of administering a debt agreement, registered debt agreement administrators and trustees authorised to self-administer their own debt agreement will already be aware of the prescribed information, such as the consequences of entering into a debt agreement, and the availability of alternative debt relief options. Accordingly, to avoid duplication of the requirements of registration, item 3 repeals subsection 185E(1).

44. Subsections 185(2A), 185(2B) and 185(2C) currently stipulate that the Official Receiver must not accept a debt agreement proposal for processing unless the debt agreement is administered by a registered debt agreement administrator, a registered trustee, or a person that passes the basic eligibility test and is not the administrator of more than 5 debt agreements.

45. Item 1 of Part 1 Schedule 1 amends paragraph 185C(2)(c) so that only a registered debt agreement administrator, registered trustee or the Official Trustee can be authorised to administer a debt agreement. Accordingly, to avoid duplication of these requirements, item 3 repeals subsections 185(2A), 185(2B) and 185(2C).

Item 4 - Application provision

46. Item 4 sets out the application provisions for amendments to the Bankruptcy Act made under Division 1 Part 1 Schedule 1. The requirement for debt agreement proposals to authorise a registered debt agreement administrator, registered trustee or Official Trustee to administer the agreement will apply to debt agreement proposals given to the Official Receiver on or after commencement of item 4, being the day after the end of the period of six months beginning on the day the Amending Act receives the Royal Assent.

Item 5 - Transitional provisions-replacement administrator

47. The requirements for a debt agreement proposal, as set out in subsections 185C(2), 185(2A), 185(2B) and 185(2C), currently allow for a debtor or other person who is not a registered debt agreement administrator or registered trustee to administer a debt agreement if they pass the basic eligibility test under section 186A, and are not administering more than 5 debt agreements at a time.

48. To ensure that debt agreement administrators have the knowledge, skills and attributes to professionally undertake their role, items 1 and 2 of Part 1 Schedule 1 amend subsection 185C(2) so that only a registered debt agreement administrator, registered trustee or the Official Trustee can be authorised to administer a debt agreement.

49. The requirement for debt agreement administrators to be registered will ensure that debtors entering into a debt agreement on or after the commencement of item 4 of Part 1 Schedule 1 will benefit from having a qualified debt agreement administrator facilitating their debt agreement. Item 4 of Part 1 Schedule 1 commences the day after the end of the period of six months beginning on the day the Amending Act receives the Royal Assent. To ensure debtors who have given the Official Receiver proposals for debt agreements before the commencement of item 4 similarly benefit from these amendments, item 5 provides for transitional arrangements.

50. Item 5 provides for the Official Trustee to replace an unregistered administrator of a debt agreement, entered into before the commencement of item 4 of Part 1 Schedule 1, under section 185ZB. This replacement will occur immediately before the end of the period of six months beginning on the day item 5 commences. Under Clause 2 of the Amending Act, item 5 commences the day after the end of the period of six months beginning on the day the Amending Act receives the Royal Assent. Accordingly, an unregistered administrator who is administering a debt agreement at Royal Assent will have 12 months' notice to register as a debt agreement administrator or trustee if they wish to keep administering the debt agreement/s they are currently administering. This replacement timeframe provides an unregistered administrator with an opportunity to keep administering their agreement/s, while also ensuring that debtors can benefit from the knowledge and expertise of a registered practitioner.

51. Under clause 51(xxxi) of the Constitution, the Commonwealth can only make laws acquiring property on just terms, including the provision of just terms compensation. Item 5 additionally provides that if the Official Trustee replaces an unregistered administrator under section 185ZB, and the replacement results in an acquisition of property from the administrator otherwise than on just terms, the Commonwealth is liable to pay compensation to the administrator.

Division 2 - Other amendments

Items 6 to 11 - Section 185ZB, section 186A, subdivision D of Division 8 of Part IX, and section 186Q

52. The requirements for a debt agreement proposal, as set out in subsections 185C(2), 185(2A), 185(2B) and 185(2C), currently allow for a debtor or other person who is not a registered debt agreement administrator or registered trustee to administer a debt agreement if they pass the basic eligibility test under section 186A, and are not administering more than 5 debt agreements at a time.

53. To ensure that debt agreement administrators have the knowledge, skills and attributes to professionally undertake their role, items 1 and 2 of Part 1 Schedule 1 amends subsection 185C(2) so that only a registered debt agreement administrator, registered trustee or the Official Trustee can be authorised to administer a debt agreement.

54. Section 186M of the Bankruptcy Act currently provides for the Inspector-General to declare a person who is not a registered debt agreement administrator or a registered trustee as ineligible to act as a debt agreement administrator. The amendments under items 1 and 2 of Part 1 Schedule 1 will make this power obsolete since unregistered debt agreement administrators will no longer be able to administer debt agreements. Item 9 therefore repeals section 186M.

55. Under current subsection 185ZB(4), the Official Trustee becomes the replacement administrator for a debt agreement administered by an unregistered debt agreement administrator who becomes ineligible to act as an administrator under section 186M.

56. As an unregistered debt agreement administrator can no longer administer a debt agreement, as a result of items 1 and 2 of Part 1 Schedule 1, and since section 186M will be repealed under item 9, subsection 185ZB(4) is obsolete and item 6 therefore repeals it.

57. Items 7, 8, 10 and 11 either amend or repeal subsection 185ZB(6), paragraphs 186A(1)(h) and (3)(e) and paragraphs 186Q(c) and 186Q(d) to reflect the repeal of section 186M.

Item 12 - Saving provisions

58. Subsection 185ZB(4) provides for the Official Trustee to replace an unregistered debt agreement administrator declared ineligible under section 186M. Subsection 185ZB(6) requires the Official Receiver to write to notify the parties to the debt agreement that the Official Trustee has become the replacement administrator and if the Official Receiver intends to appoint another person as the new administrator.

59. Section 186M of the Bankruptcy Act currently provides for the Inspector-General to declare a person who is not a registered debt agreement administrator or a registered trustee as ineligible to act as a debt agreement administrator. Item 9 of Part 1 Schedule 1 repeals section 186M as unregistered debt agreement administrators will no longer be able to administer debt agreements as a result of the amendments under items 1 and 2 of Part 1 Schedule 1. Item 9 of Part 1 Schedule 1 commences 12 months after the Amending Act receives the Royal Assent.

60. Item 12 provides that subsections 185ZB(4) and (6) will continue to apply to a person who, before the commencement of item 9 of Part 1 Schedule 1, became ineligible to act as an administrator under section 186M. This saving provision is necessary because an unregistered administrator could be declared ineligible under section 186M just prior to the repeal of subsection 185ZB(4). In the absence of this saving provision, the Official Trustee would not replace the unregistered debt agreement administrator found ineligible under section 186M, and the Official Receiver would not be required to notify the parties to the agreement.

Part 2 of Schedule 1 - Reimbursement of expenses

Items 13 to 15 - After subsection 185C(3A) and section 185LA

61. Debt agreement administrators typically recover expenses or disbursements incurred in administering a debt agreement. A recoverable expense could be a dishonour fee imposed on a debt agreement administrator where the debtor does not have sufficient funds in their account to service a direct debit arrangement. Expenses of running a business such as overheads, rent, electricity and wages are not recoverable expenses. Currently, it is not clear what debt agreement administrators can claim as expenses, how administrators may recover the expenses, and who bears the cost of the expenses. Most debt agreement administrators recover expenses directly from the funds held in trust for the administration of the debt agreement. Accordingly, debt agreement administrators take expenses in priority to creditors which are party to the debt agreement, which reduces the creditors' expected return.

62. Item 13 inserts new subsection 185C(3B) which provides that a debt agreement proposal must detail the types of expenses the debt agreement administrator can recover. This requirement ensures that creditors and debtors have an opportunity to assess the reasonableness of an administrator's practices in relation to expenses.

63. Section 185LA currently sets out the general duties of a debt agreement administrator. Under paragraph 185LA(a), these duties currently include a requirement to deal with the debtor's property in accordance with the debt agreement. Subsequent to the amendment in item 13, items 14 and 15 insert a new subsection 185LA(2), which provides that the debt agreement administrator has a duty to not reimburse themselves for expenses that were not specified in new subsection 185C(3B).

64. Including this requirement as a duty will allow the Inspector-General, under paragraphs 186K(3)(b), for an individual, or 186L(3)(b) for a company, to seek a written explanation from a debt agreement administrator, following a failure to perform their duties, with a view to possibly cancelling their registration

Item 16 - Application provisions

65. Item 16 sets out the application provisions for amendments to the Bankruptcy Act made under Part 2 Schedule 1.

66. The amendment to section 185C (item 13 - the requirement for debt agreement proposals to specify recoverable expenses) will apply to debt agreement proposals given to the Official Receiver on or after commencement of item 16, being six months after the day the Amending Act receives Royal Assent.

67. The amendments to section 185LA (items 14 and 15 - the debt agreement administrator has a duty to not reimburse themselves for expenses not specified in the debt agreement) will apply to debt agreements that come into force on or after commencement of item 16 of Part 2 Schedule 1, where the debt agreement proposals were given to the Official Receiver on or after commencement of item 16, being the day after the end of the period of six months beginning on the day the Amending Act receives the Royal Assent.

Part 3 of Schedule 1 - Value of debtor's property

Item 17 - Paragraph 185C(4)(c)

68. Currently, paragraph 185C(4)(c) of the Bankruptcy Act prevents a debtor from giving the Official Receiver a debt agreement proposal if, at the proposal time, the value of the debtor's property that would be divisible among creditors if the debtor were bankrupt (assets threshold) is more than the threshold amount. Under subsection 185C(5), the threshold amount means 7 times the amount that, at that time, is specified in column 3, item 2, Table B, point 1064-B1 of Pension Rate Calculator A, in the Social Security Act 1991 . As of April 2018, this amount is $113,349.60.

69. Due to the recent rises in Australian property prices, particularly in capital and major cities, the current threshold amount prevents a significant proportion of Australians from accessing the debt agreement system. Item 17 therefore doubles the threshold amount to ensure a greater proportion of debtors have access to the debt agreement system.

Item 18 - Application provision

70. Item 18 sets out the application provisions for amendments to the Bankruptcy Act made under Part 3 Schedule 1. The higher assets eligibility threshold will apply to debt agreement proposals given to the Official Receiver on or after commencement of item 18, being the day after the end of the period of six months beginning on the day the Amending Act receives the Royal Assent.

Part 4 of Schedule 1 - Payment to income ratio

Items 19 to 21 - Subsection 10(1) and section 185C

71. Currently paragraph 185C(2D)(c) of the Bankruptcy Act contains the only restriction on the size or frequency of a debtor's proposed payments under a debt agreement. It specifies that a debt agreement administrator should certify that the debtor is likely to be able to discharge the obligations created by the agreement as and when they fall due. While this certification provides a safeguard against the submission and adoption of unsustainable payment schedules, it does not always prevent debt agreements that could cause the debtor undue financial hardship. For example, the debtor could propose a source of future payments which is highly speculative or uncertain, such as financial assistance, income from future employment, or proceeds of an asset. In these circumstances, the proposed administrator may have reasonable grounds to believe that the payment schedule will be sustainable, however the source of funds may not ultimately become available. If a debtor proposes to pay a debt agreement using money to which they do not have access, the debtor could suffer undue financial hardship in discharging the obligations.

72. Item 20 inserts new paragraph 185C(4)(e), which provides that the debtor cannot give the Official Receiver a debt agreement proposal if the total payments 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.

73. Item 21 inserts new subsection 185C(4B) which provides that the Minister can determine the prescribed percentage by legislative instrument.

74. 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.

75. However, 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.

76. 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.

77. 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 is 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. 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.

78. 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.

79. 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 amends subsection 10(1) to provide that the Minister cannot delegate this power.

Item 22 - Application provision

80. Item 22 sets out the application provisions for amendments to the Bankruptcy Act made under Part 4 Schedule 1. The requirement that a debtor's proposal percentage does not exceed the prescribed percentage will apply to proposals given to the Official Receiver on or after commencement of item 22, being the day after the end of the period of six months beginning on the day the Amending Act receives the Royal Assent.

Part 5 of Schedule 1 - Undue hardship to debtor

Item 23 - After subsection 185E(2AA)

81. Paragraph 185C(2D)(c) of the Bankruptcy Act currently specifies that a debt agreement administrator should certify that the debtor is likely to be able to discharge the obligations created by the agreement as and when they fall due. This requirement is primarily a quantitative assessment, requiring, among other things, a comparison of the debtor's disposable income with their routine payment commitments under the debt agreement. This certification by the debt agreement administrator prevents the submission, and acceptance by the Official Receiver under paragraph 185E(2)(c) of the Bankruptcy Act, of many agreements that would cause the debtor undue hardship.

82. Item 23 inserts a new subsection 185E(2AB), which provides that the Official Receiver can refuse to accept a debt agreement proposal for processing if the Official Receiver reasonably believes that complying with the debt agreement would cause undue hardship to the debtor. Given the significant protections included elsewhere in the Amending Act, including requiring debt agreement administrators to be registered (inserted by items 1 and 2 of Part 1 Schedule 1) and the requirement for a debt agreement proposal to satisfy a payment to income ratio test (inserted by items 19 to 21 of Part 4 Schedule 1), 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 185E(2AB) not to send the debt agreement 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 would cause the debtor undue hardship.

Item 24 - Application provision

83. Item 24 sets out the application provisions for amendments to the Bankruptcy Act made under Part 5 Schedule 1. The Official Receiver's power to refuse to accept debt agreement proposals which may cause undue hardship to the debtor will apply to debt agreement proposals given to the Official Receiver on or after commencement of item 24, being the day after the end of the period of six months beginning on the day the Amending Act receives the Royal Assent.

Part 6 of Schedule 1 - Other matters

Items 25 to 32 - Section 185 and subsection 185C(2D)

84. Section 5 of the Bankruptcy Act defines the term administrator in relation to the person authorised by a debt agreement to deal with property under an agreement already in force . This definition does not cover a proposed administrator as recorded on a debt agreement proposal on submission to the Official Receiver. To provide greater clarity in the Bankruptcy Act, and for drafting simplicity, item 25 inserts a new definition into section 185 for a proposed administrator , in relation to a debt agreement proposal, to be the person specified under paragraph 185C(2)(c).

85. Items 26 to 32 make amendments to subsection 185C(2D) consequential to incorporating the new definition.

Items 33 and 38 - At the end of subsection 185C(2D) and at the end of paragraph 185EA(2)(a)

86. Under subsection 185C(2D), a debt agreement proposal given to the Official Receiver must be accompanied by a certificate signed by the debt agreement administrator nominated by the debt agreement proposal (the proposed administrator), certifying the proposed administrator has satisfied various requirements in setting up the debt agreement proposal with the debtor.

87. A proposed administrator could use a broker or referrer in its business model. Currently, a proposed administrator is not required to disclose any broker or referrer arrangements, including any commissions or other payments involved, to the debtor or affected creditors. If broker arrangements are not disclosed, the debtor would lose any opportunity to exercise their discretion to cease their relationship with the proposed administrator before submitting their debt agreement proposal, if they object to the proposed administrator's broker or referrer arrangements. Affected creditors may also want the opportunity to vote against debt agreement proposals that include certain broker arrangements.

88. Opaqueness of a proposed administrator's relationships is also problematic if an affected creditor under the proposed debt agreement is a related entity of the proposed administrator. For example, an entity could provide credit to a debtor to assist them with debts and, at a later time, refer the debtor to a proposed administrator that is a related entity. The debtor and other affected creditors may object to the proposed administrator and an affected creditor being connected in such a way if this connection is not properly disclosed prior to the commencement of the debt agreement.

89. Item 33 therefore inserts new paragraphs 185C(2D)(f) and 185C(2D)(g), which require the proposed administrator to record details of any broker or referrer information, and declare whether an affected creditor is also a related entity, in the certificate required by subsection 185C(2D). Since the debtor submits the subsection 185C(2D) certificate to the Official Receiver, they will have an opportunity to review the information before submitting the debt agreement proposal.

90. Currently, on processing a debt agreement proposal, the Official Receiver is required by subsection 185EA(1) to write to each affected creditor known to the Official Receiver to ask each affected creditor to vote on the debt agreement proposal. Subsection 185EA(2) ensures each affected creditor receives a copy of the debt agreement proposal and the debtor's statement of affairs, to assist with the voting process.

91. Item 38 inserts new subparagraph 185EA(2)(a)(iii) which requires the Official Receiver to additionally send affected creditors the subsection 185C(2D) certificate, which will include any disclosures on brokers or related entities by the proposed administrator. This provision will give affected creditors the opportunity to account for the administrator's referral arrangements, as well as whether a creditor is a related entity to the administrator, when voting on whether to accept the debt agreement.

92. Most affected creditors are likely to be large credit providers, and they are therefore generally required to comply with the Australian Privacy Principles (APPs) in the Privacy Act. However, some affected creditors are either individuals or small businesses with an annual turnover of less than $3 million. These creditors, as credit providers, are required to comply with the credit reporting provisions of Part IIIA of the Privacy Act, but are not generally required to comply with the APPs. New subparagraph 185EA(2)(a)(iii) will provide that information regarding an administrator's relationships with brokers, referrers and related entities must be disclosed to all affected creditors. Accordingly, certain affected creditors to whom the personal information is disclosed will not generally be subject to the APPs in the Privacy Act.

93. Notwithstanding this privacy concern, providing all affected creditors with an opportunity to review an administrator's relationships is essential. Money that the debtor pays to persons or entities that are not creditors, such as brokers, is money that the debtor could have otherwise paid to an affected creditor. To ensure that the voting process is fair and transparent, when an affected creditor votes on accepting a debt agreement proposal or variation, the affected creditor must be able to consider these payments to be able to decide whether they are willing to be repaid less money than they are owed.

Items 34 to 37 - Subsection 185C(3) and subsection 185C(3A)

94. Section 5 of the Bankruptcy Act defines the term administrator in relation to the person authorised by a debt agreement to deal with property under an agreement already in force . This definition does not cover a proposed administrator as recorded on a debt agreement proposal on submission to the Official Receiver. To provide greater clarity in the Bankruptcy Act, and for drafting simplicity, item 25 of Part 6 Schedule 1 inserts a new definition into section 185 for a proposed administrator , in relation to a debt agreement proposal, to be the person specified under paragraph 185C(2)(c).

95. Items 34 to 37 make amendments to subsections 185C(3) and 185C(3A) consequential to incorporating the new definition.

Items 39 and 40 - At the end of section 185EA and after subsection 185EC(1)

96. Currently, on processing a debt agreement proposal, the Official Receiver is required by subsection 185EA(1) to write to each affected creditor known to the Official Receiver to ask each affected creditor to vote on the debt agreement proposal. Subsection 185EA(2) ensures each affected creditor receives a copy of the debt agreement proposal and the debtor's statement of affairs, to assist with the voting process.

97. If the proposed administrator of the debt agreement charges an upfront fee which the debtor has not fully paid when submitting the debt agreement proposal, the proposed administrator becomes an affected creditor with voting rights on the debt agreement corresponding to the outstanding amount owing. A proposed administrator could also have voting rights on a debt agreement they are administering if they hold a credit licence and previously lent the debtor money. Alternatively, a related entity of the proposed administrator could be an affected creditor on a debt agreement proposal to be administered by the proposed administrator.

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

99. Item 39 therefore inserts new subsection 185EA(4). New paragraphs 185EA(4)(a) and 185EA(4)(b) provide that the Official Receiver should not request a vote from a proposed administrator that is an affected creditor, or from a related entity to the proposed administrator.

100. Under subsection 185C(2D), a 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, the Official Receiver will therefore be able to identify which affected creditors are related entities of the proposed administrator. Under new paragraph 185EA(4)(b), the Official Receiver will not seek a vote from these affected creditors on the debt agreement proposal.

101. To be excluded from voting under new paragraph 185EA(4)(b), the affected creditor would need to be a related entity when they became an affected creditor, rather than when the proposed administrator fills out its disclosure under new paragraph 185C(2D)(g). This better captures circumstances where a creditor purchased debt, or provided credit, in such a way that could inappropriately influence voting on a debt agreement proposal.

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

103. As an example of how the majority in value rule currently operates - Jason's unsecured creditors are Credit 1, Credit 2 and Credit 3. He owes $30,000 to Credit 1, $20,000 to Credit 2 and $20,000 to Credit 3. Jason submits a debt agreement proposal to the Official Receiver where he authorises proposed administrator Debt Agreements 123 to administer his debt agreement should it come into force. Debt Agreements 123 was a related entity to Credit 2 at the time Credit 2 became an affected creditor to Jason. After accepting the debt agreement proposal for processing, the Official Receiver requests a vote from the three affected creditors. All three creditors reply to the request: Credit 1 approves the proposal; Credit 2 and Credit 3 reject the proposal. Of the $70,000 owed by Jason to his three creditors, a majority in value is more than $35,000. As Credit 1 has $30,000 of voting power, the proposal is not accepted.

104. To ensure the results of the vote are not impacted by potential conflicts of interest, item 40 inserts new subsection 185EC(1A), which amends the acceptance rule to require the Official Receiver to disregard any votes received from the proposed administrator or a related entity of the proposed administrator.

105. If a proposed administrator does not disclose that an affected creditor was their related entity when they became an affected creditor, and the Official Receiver becomes aware of the relationship before the debt agreement proposal is accepted, new subsection 185EC(1A) will allow the Official Receiver to disregard the affected creditor's vote.

106. As an example of how the amended majority in value rule will operate - the example involving Jason, above, is identical. If Debt Agreements 123 fails to disclose that Credit 2 is a related entity, Jason will submit an incomplete subsection 185C(2D) certificate to the Official Receiver with the debt agreement proposal. After accepting the debt agreement proposal for processing, the Official Receiver requests a vote from the three affected creditors (being unaware at this stage that Credit 2 is a related entity of the proposed administrator). All three affected creditors reply to the request for a vote: Credit 1 approves the proposal; Credit 2 and Credit 3 reject the proposal. On receiving the votes, the Official Receiver becomes aware that Credit 2 is a related entity of the proposed administrator. Following new subsection 185EC(1A), the Official Receiver disregards the vote from Credit 2. With Credit 2 disregarded, the majority in value rule now disregards Credit 2's debt. Of the $50,000 owed by Jason to Credit 1 and Credit 3, a majority in value is more than $25,000. As Credit 1 has $30,000 of voting power, the debt agreement proposal is accepted.

107. The conflict of interest concerns underlying amendments under items 39 and 40 do not apply where a debtor proposes to self-administer their own debt agreement, and an affected creditor is a related entity. Accordingly, items 39 and 40 insert new subsections 185EA(5) and 185EC(1B), which provide that a related entity to the proposed administrator is not prevented from voting on a debt agreement if the debtor proposes to self-administer their agreement.

Item 41 - At the end of section 185EC

108. Under subparagraph 185C(2)(d)(i), a debt agreement proposal must provide that all provable debts under the agreement must rank equally. Prior to the commencement of this requirement, a debt agreement proposal could provide for the distribution of funds to creditors other than in proportion to their debts. This created an opportunity for creditors with larger debts, and consequently greater voting power under paragraph 185EC(1)(b), to request that the debt agreement provide them with more than their proportionate share of any dividends. These arrangements unfairly disadvantaged creditors with smaller debts. A creditor could circumvent the requirement for debts to rank equally by requesting cash incentives from the proposed administrator in exchange for its acceptance of the debt agreement proposal.

109. Item 41 inserts new subsection 185EC(6), which introduces an offence for a proposed administrator that gives, agrees, or offers to give an affected creditor an incentive for voting a certain way on a debt agreement proposal.

110. The offence for a proposed administrator contravening new subsection 185EC(6) is three months' imprisonment. This punishment is appropriate to deter fraudulent conduct in the financial sector which can have severe consequences for both affected creditors and debtors.

Item 42 - Application provision

111. Item 42 sets out the application provisions for amendments to the Bankruptcy Act made under Part 6 Schedule 1. These provisions will apply in relation to debt agreement proposals given to the Official Receiver on or after commencement of item 42, being the day after the end of the period of six months beginning on the day the Amending Act receives the Royal Assent.