Australia

Personal Insolvency

Debt Agreement Amendments

Debt agreements were introduced in 1996 to provide an alternative to bankruptcy for debtors with low incomes and levels of debt. Following a comprehensive review, the Bankruptcy Legislation Amendment (Debt Agreements) Act 2007 obtained Royal Assent on 10 April 2007 and will take effect on 1 July 2007. This Act amended the Bankruptcy Act 1966 to:

(a) provide for enhanced regulation of debt agreement administrators, including a requirement that they be licensed;
(b) specify the duties of a debt agreement administrator;
(c) encourage creditors to make voting decisions in respect on debt agreements based on the debtor’s capacity to pay;
(d) provide more effective means of dealing with default by the debtors subject to debt agreements; and
(e) simplify, streamline and clarify a range of provisions to improve the operation of the debt agreement regime.

Further details about these amendments is available here.

Superannuation and Bankruptcy

The Bankruptcy Legislation Amendment (Superannuation Contributions) Act 2007 (the Act) received Royal Assent on 15 April 2007.

The amendments allow bankruptcy trustees to recover superannuation contributions made prior to bankruptcy with the intention to defeat creditors. The rules for recovering superannuation are based closely on section 121 of the Bankruptcy Act 1966. These amendments have commenced and are applicable to contributions made on or after 28 July 2006.

The amendments will also allow an Official Receiver to issue a Notice to freeze a contributor's interest in a superannuation fund or a Notice pursuant to section 139ZQ to recover void contributions in the same way as other void transactions where the Official Receiver has reasonable grounds to believe the contributions are void. These amendments will commence on 16 October 2007.

Changes to Part X

Significant reforms to the Bankruptcy Act have been made to a debtor's voluntary arrangements with creditors under Part X of the Act. These include a more streamlined and transparent process for such 'personal insolvency agreements'.

Bankruptcy and Family Law

Reforms commenced in September 2005 to ensure that concurrent bankruptcy and family law financial proceedings are able to be dealt with by the same court, the Family Court of Australia, at the same time.

Strengthening Bankruptcy Act Anti-Avoidance Provisions

A Bill has been introduced into Federal Parliament which is designed to strengthen the ability of bankruptcy trustees to recover property transferred prior to bankruptcy as well as property acquired by a third party prior to bankruptcy using the bankrupt's resources and from which the bankrupt has derived a benefit.

Key Legislation

• Bankruptcy Act 1966 (as amended)
• Bankruptcy (Estate Charges) Act 1997
• Bankruptcy (Registration Charges) Act 1997
• Bankruptcy Regulations
• Bankruptcy Rules
• Family Law Act 1975
• Family Law Rules 2004

Insolvency Procedures

Personal Insolvency procedures

The personal insolvency system in Australia provides an orderly means for:

• Creditors to recover, where possible, money owing to them, and;
• Debtors to obtain relief from debt so they can again participate in the financial
  system.

The options for dealing with, or available to, debtors who cannot meet their financial obligations are:

• Bankruptcy by Creditors Petition - This is involuntary bankruptcy where a creditor seeks a court order to make the debtor bankrupt.
• Bankruptcy by Debtors Petition - This is voluntary bankruptcy where the debtor makes the decision to become bankrupt. It is an administrative procedure, ie it does not require court involvement. The debtor files the bankruptcy petition with the Official Receiver who is a government official and the debtor becomes bankrupt providing the petition and the debtor's Statement of Affairs are properly completed.
• Arrangement with creditors under Part X of the Bankruptcy Act (a Personal Insolvency Agreement) - This is a procedure which enables a debtor to come to an arrangement with creditors and avoid bankruptcy. It is designed for debtors who have a reasonable amount of assets or are operating a business. The debtor makes a proposal to creditors which must be supported by a `special majority' (75% in value and 50% in number of those creditors who vote) for it to proceed. The arrangement is administered by a registered trustee and is legally binding on all creditors. Failure to abide by it may lead to bankruptcy.
• Arrangement with creditors under Part IX of the Bankruptcy Act (a Debt Agreement) - This is another procedure which enables a debtor to come to an arrangement with creditors and avoid bankruptcy. As with Part X arrangements, a 'special majority' is required for it to proceed, but the voting is done by post, thereby avoiding the cost of meetings. The person administering the arrangement does not have to be licensed but there are prohibitions on their eligibility to act. Any person, including the debtor or a friend or family member, can administer a Debt Agreement although in practice most are administered by fee earning businesses. It is designed as a less formal, low cost procedure. It is restricted to debtors with low assets and relatively low incomes.

Upon bankruptcy, all of the debtor's assets with certain exceptions are surrendered to the trustee. The exceptions are:

• Essential household items such as furniture and whitegoods;
• Tools of trade - as required for the bankrupt to continue working;
• Transport vehicle of a value no more that $5,500 (indexed);
• Property held on trust;
• Personal property - as prescribed by regulations or agreed by creditors;
• Payouts from life insurance, compensation or superannuation (with certain exceptions
  stated under the Bankruptcy Act);
• Interest in Superannuation Funds up to approximately $1.1 million
  Payments under Family Court Orders.

These exceptions do not include the debtor's residence.

Once appointed, a trustee investigates the bankrupt's affairs and recovers and distributes assets on behalf of the creditors. A bankrupt may be required to make income contributions to the bankrupt estate if their income is above a certain amount. Ordinarily a person remains bankrupt for three years but in certain circumstances bankruptcy may be extended to five or eight years. The three year period does not commence until the bankrupt lodges their Statement of Affairs where a creditor has made a person bankrupt.

A bankrupt may apply for the annulment of their bankruptcy. Annulment restores the bankrupt
to the position they were in before their bankruptcy, so far as debts and liabilities are
concerned.

• Annulment of bankruptcy under section 73 of the Bankruptcy Act - A bankrupt may
  annul their bankruptcy by putting forward a proposal which is acceptable to a'special
  majority' of creditors.
• Annulment of bankruptcy under section 153A of the Bankruptcy Act - A bankrupt may
  annul their bankruptcy by payment of all their debts including the costs and fees of
  their administration.
• Annulment of bankruptcy under section 153B of the Bankruptcy Act - A bankrupt may
  annul their bankruptcy by obtaining a court order to that effect.

Corporate Insolvency procedures

see ASIC

Roles

Role played by Government

ITSA is the Government agency responsible for the administration of the personal insolvency system. ITSA plays a number of roles in the system, acting as either the Inspector-General in Bankruptcy, Official Receiver or Official Trustee, as follows:

• As Official Receiver, operates the Bankruptcy Registry service, where debtors' petitions and Debt Agreement proposals are lodged, and provides information to debtors in financial distress, and maintains the National Personal Insolvency Index which includes a register of bankruptcies;
• As Official Receiver, exercises information gathering and coercive powers to assist trustees;
• As Official Trustee, administers bankrupt estates where private trustees are not appointed;
• As Inspector-General, regulates bankruptcy trustees including conducting administrative review of trustees' decisions;
• As Inspector-General, decides on applications for the extension of time for payment, or waiver, of fees and charges;
• As Inspector-General, investigates alleged offences under the Bankruptcy Act; Adviser to government on policy and legislative reform.
• Senior officers at ITSA act as the Minister's delegate in deciding whether to fund
  bankruptcy, or related, proceedings or inquiries.

Role played by private sector practitioners

For personal insolvency, private sector practitioners include:

• Registered trustees
• Controlling trustees
• Debt agreement administrators (DAA)

Registered trustees administer bankrupt estates and other arrangements under the Bankruptcy Act. They must be licensed by ITSA to practice. They generally handle the larger bankruptcies and arrangements with creditors which have the potential to pay fees. Most are members of medium to large accounting firms. Some are sole practitioners or operate `boutique' insolvency practices. All are qualified accountants. The representative practitioner body is the Insolvency Practitioners Association Australia (IPAA).

Controlling trustees can be solicitors, registered trustees or the Official Trustee. Solicitor controlling trustees are not licensed by ITSA but are regulated by the legal industry. However, they can be disqualified from acting as controlling trustees in certain circumstances.

DAAs administer Debt Agreements. They are not required to be licensed or hold specific qualifications, but the Regulations provide prohibitions on their eligibility to act as DAA. The prohibitions relate to a DAA's propriety and include persons who are undischarged bankrupts or insolvents undergoing an insolvency administration, or persons who are prevented from practising as a registered trustee or liquidator or taking part in the management of a corporation.

Role played by the Court

The Federal Magistrates Service (lower court) and the Federal Court of Australia (superior court) have jurisdiction for personal bankruptcy matters. The courts accept petitions by creditors seeking bankruptcy orders against debtors and conduct judicial hearing of those matters. The courts also adjudicate on other disputes arising from the administration of bankruptcy.

The Family Court of Australia has jurisdiction in relation to bankruptcy matters where a party to family law financial proceedings is a bankrupt or is subject to a personal insolvency agreement.* This ensures that concurrent bankruptcy and family law financial proceedings are able to be dealt with by the same court at the same time. Generally, the trustee will be joined as a party to property or spousal maintenance proceedings under the Family Law Act 1975 where the court is satisfied that the interests of the bankrupt's or debtor's creditors may be affected by an order and where a party to those proceedings became bankrupt or subject to a personal insolvency agreement before a final order is made. In these circumstances, the trustee effectively `stands in the shoes' of the bankrupt or debtor and is able to make submissions on behalf of creditors in relation to vested bankruptcy property. Once the trustee has become a party to the family law financial proceedings, the bankrupt or debtor can only make submissions in relation to the vested property in exceptional circumstances.

In addition, there is the Administrative Appeals Tribunal (AAT) which conducts independent review of decisions made by bankruptcy trustees, the Inspector-General and the Official Receiver.

*note: these changes will take effect from 18 September 2005

At a Glance

Does the personal insolvency system in Australia allow for:

1.	Different procedures for the insolvency of individuals and the insolvency of companies?
2.	Creditors to accept an arrangement outside of formal bankruptcy/liquidation proceedings?
3.	Priority payment for employee creditors?
4.	Priority payment for taxation debts?
5.	Automatic disqualification of directors of failed companies from managing other companies?
6.	Recognition of insolvency proceedings being conducted in another jurisdiction?
7.	A government agency to undertake insolvency administration work?
8.	Some form of licensing of private sector practitioners?
9.	A review of the remuneration claimed by an insolvency practitioner by either a court or other government regulator?
10.	A mandatory scale of fees applicable to insolvency practitioner remuneration?
11.	Surveillance of the work of private sector practitioners by a government regulator?
12.	Collation of insolvency statistics by a government regulator?