The Proposed Reform
The federal government is proposing reforms to personal bankruptcy law. If passed, allbankrupts will be automatically discharged after one year, unless the bankruptcy trustee objects to the discharge beforehand. Currently, bankrupts are automatically discharged after three years.
The government believes that these reforms will encourage entrepreneurship and innovation in the Australian economy. Innovation and entrepreneurship involve risk and failure. The current three year term of bankruptcy is seen as a disincentive to risk taking amongst entrepreneurs by ‘punishing’ them too severely if they fail. Undischarged bankrupts cannot manage corporations, cannot travel overseas without permission, cannot retain many professional and commercial licences, and have difficulty getting credit. By ending bankruptcy automatically after one year, the government hopes that entrepreneurs will be encouraged to take risks, re-enter the economy faster and will be more likely to start a successful, productive venture.
The Australian middle market is the birthplace of innovation and entrepreneurship. As an advocate for the middle market, Pitcher Partners supports initiatives that encourage genuine innovation and entrepreneurship in the Australian middle market, however cautions against an approach that will undermine innovation and entrepreneurship by not holding ‘rogue' bankrupts to account. We consider the vast majority of bankruptcies are ‘genuine’, that is, they have taken a risk and failed for legitimate reasons. We support an automatic one year discharge for ‘genuine’ bankruptcies.
Why We Are Worried
Pitcher Partners is one of Australia’s largest providers of personal insolvency services. From over 30 years of experience, we know a small minority of ‘rogue bankrupts’ will exploit the proposed reforms, and undermine the government’s objectives of promoting genuine innovation and entrepreneurship.
At the heart of the government’s proposed reform is an automatic discharge from bankruptcy after one year. Unless the bankruptcy trustee has managed to identify grounds to object to the discharge in that first year, all bankrupts will be out of bankruptcy after 12 months, regardless of the circumstances which led the person into bankruptcy.
Under this new scheme, bankrupts will be discharged after 12 months:
- Despite being convicted of fraud
- Despite having never paid tax
- Despite having deliberately ripped off creditors for millions of dollars
- Despite having declared bankruptcy on multiple prior occasions
This is a perverse outcome which may reward bad behaviour, encourage fraud and lead to the exploitation of creditors. This outcome will undermine the government’s attempt to promote genuine innovation and entrepreneurship and should not be allowed.
What’s the Solution?
How does the government encourage innovation and entrepreneurship while not rewarding bad behaviour, fraud and creditor exploitation?
A more cautious approach is required.
While Pitcher Partners supports one year bankruptcies, we firmly believe that it should not automatically apply to all bankrupts.
In our detailed submission to the Senate Legal and Constitutional Affairs Committee in response to the proposed reforms, Pitcher Partners set out a simple mechanism for this to occur.
Our proposal is that after 12 months in bankruptcy, an ‘eligible’ bankrupt should be entitled to apply to their bankruptcy trustee for early discharge. If the bankruptcy trustee has no proper basis to refuse, the trustee must agree to the early discharge. In our view, the overwhelming majority of bankrupts who do, and have done the right thing will be eligible to apply for early discharge.
A bankrupt would be ‘ineligible’ for early discharge if certain factors applied. These include:
- The bankrupt owes more than $1 million to the Australian Taxation Office
- The bankrupt owes total unsecured creditors an amount exceeding $10 million
- The bankrupt has been convicted of fraud or dishonesty offences in the 10 years prior to bankruptcy
- The bankrupt has been banned by ASIC from being a director within the 10 years prior to bankruptcy
- The bankrupt has been previously bankrupt in the five years prior to the current bankruptcy
If the Pitcher Partners’ proposal is adopted, the government would carve out a small group of ‘rogue’ bankrupts whose pre-bankruptcy behaviour would not be rewarded with a brief, 12 month term of bankruptcy. In fact, Pitcher Partners has also recommended changes to strengthen the ability to extend the bankruptcy period for ‘rogue’ bankrupts. These ‘rogue’ individuals would remain bankrupt for three years, or longer if grounds of objection exists, but under the Pitcher Partners’ proposal, the government would still achieve its intention of returning the genuinely entrepreneurial and innovative bankrupts to the economy quickly and effectively.
What Does the Future Hold?
The government has received a mixed response in the various submissions made by insolvency, accounting and legal professionals and other bodies. While draft legislation has been prepared, the Senate is undertaking a consultation process from industry players. Given the priority the Turnbull government has given to innovation and entrepreneurship, there is clearly a parliamentary momentum to reform bankruptcy law and we expect changes to be made within 12 months.
We have done our best to warn the government of the unintended consequences of their current law reform proposal. Those consequences can be addressed with simple changes to the proposed reforms.
We hope that our warnings are heeded.