29 November 2016

Status of proposed reduction of bankruptcy term to one year

In December 2015 the Federal Government announced proposed reforms to insolvency laws as part of its National Innovation Statement (NIS).

The NIS includes a controversial proposal to reduce the current minimum bankruptcy term from three years to one year. The rationale is to encourage individuals who innovate to ‘fail quickly’. This proposal has received a lot of attention in the mainstream press and we have received many queries regarding the status of this proposed reform.

The Government called for submissions – which closed on 27 May 2016. 72 submissions were received, including from Australia’s peak insolvency body – ARITA and various law societies and insolvency practitioners Australia-wide.

The proposed reform forms part of the Government’s second tranche of insolvency reforms, which according to the Minister for Revenue and Financial Services are being progressed.

However, since the Federal election, the progress of the mooted reforms appears to have slowed.

In the absence of draft legislation, how the proposal will work in practice is open to speculation. At a high level, by way of example, it seems:

  1. while the default bankruptcy period will be reduced to one year, the requirement to make income contributions (where applicable) will continue for three years, with capacity for extension where there is misconduct;
  2. the prohibition on overseas travel without the trustee’s consent will reduce to one year in line with the proposed reduced default bankruptcy period.

What is apparent is that Australia is poised to substantially alter the operation of bankruptcy laws to favour debtors over creditors. However, where the majority of bankruptcies in Australia are related to consumer rather than business debt, will the Government’s policy of encouraging individuals to innovate by reducing the risks of failure really have the desired effect?

How will your everyday entrepreneur source credit for their next venture when their bankruptcy will still be reported on the National Personal Insolvency Index?

What will be the effect on the bankrupt’s creditors who remain unpaid (particularly those who are small businesses)?

There is a balance to be struck between creditors’ interests and encouraging innovation and the current reforms arguably swing too far in favour of bankrupts. There will be a flow on effect in terms of potentially higher credit costs and ripple effect bankruptcies and insolvencies. Whether the reform will encourage successful innovation remains to be seen.