Drive Thru Bankruptcies - Coming Soon to Australia
I hope this headline has got your interest! Yes Drive Thru Bankruptcies or more correctly put 1 year bankruptcy terms were announced as part of the (1) Productivity Commission’s Report to the Federal Government on 7 December 2015 that looked at key drivers of business set-ups, transfers and closures. This proposal and other changes were reforms announced as part of the National Science and Innovation Agenda by the Prime Minister and then the subject of a (2) Proposal Paper in April 2016.
It has been expressed that Australia’s bankruptcy laws are overly punitive (when compared to other overseas jurisdictions) and that by reducing the current bankruptcy term from 3 years to 1 year that this will likely encourage greater risk taking and promote entrepreneurial activity. However when one analyses the Australian bankruptcy statistics, only about 25% of bankruptcies appear to be business related. So on this point alone, it does not make a great deal of sense that by reducing the bankruptcy period, it is going to be a game-changer insofar as spurring on entrepreneurial activity is concerned.
There is no doubt whatsoever that we need a bankruptcy regime that adequately protects and facilitates the opportunity for a recovery for creditors, but equally provides a mechanism for the individual to re-establish themselves. However, getting the balance right is paramount for all stakeholders and one wonders whether the proposed changes will achieve these aims. Additionally what is important, particularly for the individual is that they fully understand the options available to them when dealing with financial difficulty and they get advice from a suitably qualified professional.
In my experience, when an individual makes the decision to enter into bankruptcy voluntarily (or this occurs via a Court process), I would suggest the real issue that is the limiting factor in them advancing their financial position post being discharged from bankruptcy is the impact of bankruptcy (ie the event itself) on a person’s credit file, not necessarily the bankruptcy time period.
Given the proposed change in bankruptcy term and before some readers choke on their tea or coffee, what should be noted is that the proposed reduction will not change the law regarding the current “vesting of property” and “income contribution regime” provisions. However, the later provision will become more problematic because whilst a bankruptcy trustee will still be required to assess an individual’s income in years 2 and 3, adequately getting the discharged bankrupt to comply with information provisions and also pay contributions will be difficult unless the anti-avoidance provisions are sufficiently drafted. Let’s hope the drafting provides an adequate level of protection!
As mentioned, access to credit post-bankruptcy is I believe the more constraining issue presently, as a record of an individual’s bankruptcy presently remains on a commercial credit record for generally 5 years after the date of bankruptcy. The proposed changes reduce such period to 1 year. I think this period is potentially a bit skinny, but as the bankruptcy will still remain on the National Personal Insolvency Index, I suspect providers of credit will modify their application searches and act accordingly. So let’s let see if it does genuinely improve access to credit!
Whilst it can be argued that in certain bankruptcies reducing the term to 1 year will have little or no impact on creditors, I can see in other more complex bankruptcies the bankruptcy period being extended for a range of reasons. So I am not sure it is necessarily going to have the effect that the Federal Government and Legislators want. I think we need to see what is contained in the draft legislation before making further assessments, but one thing to be wary of is that there will undoubtedly be some parties that seize the moment and heavily market the new reduced bankruptcy term to individuals who are already in an emotionally vulnerable condition and therefore need the right advice to make an informed decision.
I take particular time to understand and fully explain the options to people in financial difficulty so that an informed decision can be made.
by Bruce Gleeson