Entrepreneurs to benefit from new bankruptcy laws

Bankruptcy period to be reduced from three years to one year

As part of the Federal Government’s initiative to promote entrepreneurship and innovation and to reduce the stigma associated with bankruptcy, a proposed law – the Bankruptcy Bill – was introduced and passed by both houses of Federal Parliament a month ago. As part of the National Innovation and Science Agenda, the Bankruptcy Amendment (Enterprise Incentives) Bill 2017, which reduces the bankruptcy period to just one year, will take effect within 12 months.

While this is a positive step for entrepreneurs, it has an endemic effect on small to mid-sized businesses and sole traders as creditors. Whilst it promotes entrepreneurship and innovation, it also fosters a less risk adverse culture towards incurring debt and the capacity to pay creditors.

Bankruptcy is often the last resort enforcement mechanism used by creditors to recover assets from a debtor and its consequences are far-reaching. However, the knock-on effect can impact creditors and debtors alike.

Who is affected?

There are five predominant stakeholders in bankruptcy:

1. The applicant creditor – the creditor who has applied to the Court to bankrupt the debtor. However, sometimes the debtor has voluntarily entered their own petition.
2. The debtor – the person that owes the sum of money.
3. The other creditors – often there may be other secured and unsecured creditors who are owed money from the debtor. An example of a secured creditor is a bank, which usually has a mortgage over property, or a car financier, who has security over your vehicle via a registered security interest on the Personal Property Securities Register (PPSR). An unsecured creditor does not have any security.
4. The Trustee in Bankruptcy – this is the insolvency practitioner who is appointed as the Trustee over the debtor’s affairs upon sequestration or upon the acceptance of the debtor’s petition.
5. The Australian Financial Security Authority (AFSA) is the regulatory body that deals with insolvency, PPSR and insolvency professionals.

The risk shifts to small to mid-sized enterprises (SMEs), who will need to factor this risk into any loans, lines of credit, security and recovery costs when doing business with debtors.

What are the proposed reforms?

The Bankruptcy Bill will amend the Bankruptcy Act 1966 (Cth) as follows:

1. It will reduce the default period of bankruptcy from three years to one year.
2. However, it will preserve a trustee’s ability to extend the period of bankruptcy in cases of misconduct.
3. The amendments in Part 1 of this Bill will mean that current restrictions associated with bankruptcy will automatically reduce from three years to one year so that upon discharge a former bankrupt may:
   • travel overseas without trustee permission;
   • apply for credit over the prescribed amount without obligation to actively disclose their bankruptcy, and
   • enter into certain professions or positions, for example, becoming a company director.
4. Currently bankrupts are obligated to pay income contributions until discharge, particularly if their income exceeds the prescribed threshold. To ensure that high income earners do not abuse bankruptcy laws by attempting to “hide” or “reduce” their income for a year, or “hide” their assets and incur excessive debt, the Bill contains measures that extend income contribution obligations for discharged bankrupts for a minimum period of two years following discharge or, in the event that a bankruptcy is extended due to non-compliance, for five to eight years.

How does that affect the AFSA?

According to the Assistant Minister to the Treasurer, Mr Hawke, the new measures “…[are] estimated to result in savings to the insolvency industry of $50 million per annum from the commencement of this bill, with positive flow-on impacts for creditor returns.”

How does that affect creditors?

The flow-on effect of the Bankruptcy Bill is that creditors will be dealing with debtors who may have a reduced fear of failure or inhibition to incurring debt, so the risk shifts to small to mid-sized enterprises (SMEs), who will need to factor this risk into any loans, lines of credit, security and recovery costs when doing business with debtors (particularly, those without assets).

What should my business (as the creditor) be doing?

We recommend that you urgently:

1. Review your debtors who are in excess of 60 days, re-consider ongoing supply or any sporadic payments from debtors and/or enforcement action;
2. Review your terms and conditions for adequate PPSR securities;
3. Ensure any secured loans, lines of credit etc are registered on the PPSR and create a register of those secured interests; and
4. Consider your current default terms, criteria for providing lines of credit, and the form of security you are obtaining, the value of the asset that you have security over, the likely sale value of the asset, cost of sale, repossession and default interest.

For confidential advice concerning your business interests, please contact Streeterlaw on 8197 0105 or email advice@streeterlaw.com.au

Written by Mark Streeter

The Director of Streeterlaw, Mark has been practicing Law since 1994. He has attained his Masters of Law in 1999 and in 2006 was awarded his Specialist Accreditation in Commercial Litigation. Mark is a member of ARITA, a graduate of the AICD and a member of AICM. A member of STEP, Mark enjoys working in the area of Wills and Estates. In 2020 Mark is the Chair of STEP NSW.

Call us on 02 8197 0105 to book an appointment with Mark Streeter!