Proposed changes to insolvency laws, currently before Parliament, could see the bankruptcy discharge period in Australia reduced from three years to one. Critics, including CPA Australia, say proposed changes to bankruptcy laws will cause more harm than good. Here’s what you need to know.
By Zilla Efrat
The proposals, contained in the Bankruptcy Amendment (Enterprise Incentives) Bill 2017, were endorsed by the Senate’s Legal and Constitutional Affairs Legislation Committee in March following an inquiry.
This is not the first time that Australia’s bankruptcy discharge period has fallen to one year. The Bankruptcy Act 1966 previously allowed an “early discharge” after 12 months at the bankruptcy trustee’s discretion. But the law changed back to a three-year period in 2003 because it was believed the shorter period discouraged debtors from trying to enter debt arrangements with their creditors.
“Australia does have one of the more punitive bankruptcy regimes in the world, but it’s not the most punitive,” says John Winter, CEO of the Australian Restructuring Insolvency and Turnaround Association.
South Africa, for example, has a 10-year bankruptcy discharge period. New Zealand has a three-year discharge period and, in the UK, it’s currently one year, although it’s been raised to three years in the past.
Winter says the latest one-year period was recommended by the Productivity Commission inquiry into Business Set-up, Transfer and Closure.
Prime Minister Malcolm Turnbull also liked the idea of allowing people to rehabilitate their credit failures in a speedier manner. Plus, it’s very much in line with his government’s National Innovation and Science Agenda.
Will changes to the bankruptcy laws foster entrepreneurial behaviour?
Shabnam Amirbeaggi, a liquidator at Crouch Amirbeaggi, says: “As I understand it, the general reasoning behind the proposed changes is to ‘foster entrepreneurial behaviour and to reduce the stigma associated with bankruptcy’.”
However, many of the Bill’s critics don’t believe it will fuel more entrepreneurial activity.
Says Winter: “Entrepreneurs are very optimistic by nature. Most don’t spend a lot of time thinking about the possible failure of their business, otherwise they would not have started them in the first place. So, there is an argument that this won’t make a profound change.”
There are also concerns that the changes may propel serial bankrupts back into business with detrimental spinoff effects, particularly on small businesses.
Bankruptcy is personal, not business
CPA Australia’s policy adviser – ESG, Dr John Purcell, says bankruptcy statistics show that most bankruptcies stem from personal matters rather than business matters – and are not really filed by “innovative types”.
Indeed, the Senate inquiry into the Bill was told that about 20 per cent of personal bankruptcies are business-related, the remainder being personal or consumer-related bankruptcies.
The Australian Financial Security Authority (AFSA), which regulates the personal insolvency system, also provided statistics suggesting that the main reasons for personal bankruptcy are excessive use of credit, unemployment or loss of income, as opposed to business-related reasons.
With this in mind, some of those appearing before the inquiry suggested that in order to properly promote entrepreneurship, the changes should be directed to business-related bankruptcies only.
However, during the second reading of the Bill in Parliament, Assistant Minister to the Prime Minister Senator James McGrath explained that distinctions between personal and business bankruptcies can be blurred in cases where owners of small businesses need to secure business loans with their personal assets or provide personal guarantees.
And, the Attorney-General’s Department told the inquiry that drawing a distinction between personal and business bankruptcies would be impractical or even impossible.
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Ethical dilemma for practitioners
From an accountant’s perspective, Purcell says: “The limited feedback we received from our members was that on the face of it, this is not a good idea.
“Part of the concerns expressed to us was that with the incentives associated with a one-year discharge period, public practitioner members would be presented with more people than usual who want to avail themselves of what looks like a quicker way of relieving themselves of a difficult financial situation.
“There are also ethical dilemmas for public practitioners in terms of being asked to be complicit in assisting individuals into bankruptcy when in fact there are other alternatives.”
CPA Australia has recommended that if the one-year discharge period is legislated, there should be a review process to assess how the changes are working, he says.
“These are not simple matters,” says Purcell. “The law will become increasingly complicated because we may be reducing the automatic discharge period, but there are accompanying changes being made.”
He notes that as part of the changes, there are moves to strengthen the various rules around the capacity for AFSA and trustees in bankruptcy to object to the discharge.
“And, there will also be increased obligations on the part of people availing themselves of the one-year discharge to maintain their financial records.”
Purcell says public practitioners will need have to build a certain level of understanding of the new laws, if passed, and to work closely with an insolvency practitioner or trustee to assess whether bankruptcy is the best option for the individuals concerned.
“Bankruptcy isn’t the only option. In fact, it’s not even the most common option when it comes to how people handle personal insolvency,” adds Winter.
Other options beyond bankruptcy include personal insolvency agreements and debt agreements.
Expert advice essential
Winter says: “The most important thing for an accountant who is dealing with clients in financial distress is to ensure that they get independent expert advice as to what the best personal and corporate insolvency options are. AFSA has some guidance as to when different options may work for different people.
“We would also urge all accountants to tell their clients in distress not to do a Google search and not to choose the first people who come up.
“Invariably, those people are selling a product or are unregulated dodgy advisors who try and convince people to pay lots of money for service that will do nothing to help them.
Unfortunately, this is rife at the moment.”
Winter lists these as the critical links for accountants to push their client to:
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