Insolvency and debt recovery

In May 1976 the ALRC received terms of reference requiring it to report upon whether the Bankruptcy Act 1966 (Cth), as it applied to small debtors, made adequate provision for the compromise or discharge of their debts from present or future assets and earnings. The Commission also was required to consider what measures, if any, could be adopted to achieve this objective and what measures could be adopted by way of legislation to provide financial counselling facilities to small debtors.This resulted in ALRC Report 6 which concluded that the existing systems were inadequate, as they did not meet the needs of a modern consumer credit based society. The procedures provided under the Bankruptcy Act for rearranging of debts were costly, cumbersome and inappropriate for the needs of non-business debtors.

ALRC Report 36, Debt recovery and Insolvency, arose from the same reference as Insolvency: The Regular Payment of Debts (ALRC Report 6). During its work on the first report, the Commission identified that judgment debt recovery procedures in the States and Territories could contribute to worsening insolvency. Accordingly, the Commission investigated these procedures more fully in ALRC Report 36.

The report identified that the existing debt recovery procedures differed across jurisdictions and that this posed a problem when debts incurred in one jurisdiction needed to be recovered in another. ALRC Report 36 concluded that many court procedures were inefficient and wasteful of both court and creditor resources.

ALRC Report 6 had recommended a review of the entire law of bankruptcy, and the general insolvency inquiry, resulting in ALRC Report 45, was a response to that recommendation.

ALRC Report 45 examined the developments of overseas jurisdictions in relation to insolvency and identified that existing forms of voluntary administration were unnecessarily complex, confusing and uncoordinated.

The report concluded that the existing law of insolvency had not kept pace with the economic and social changes that had taken place in Australia nor with the needs of the ever increasing number of people and corporations who were experiencing insolvency.

Key recommendations

ALRC Report 6

• A system for the regular payment of debts for non-business debtors should be established.
• There should be an automatic six-month discharge for non-business debtors unless creditors object.
• There should be provision of trained licensed debt counsellors to non-business debtors.

ALRC Report 36

• A single debt recovery office should take over the debt recovery work of the lowest two tiers of the courts hierarchy.
• Debt collection agencies should be regulated by a code of conduct.
• The legislative provisions for enforcing judgments should be amended to ensure they are fair to the debtor as well as the creditor.
• The legislation should be uniform between the states or the federal government should enact an overriding federal statute.

ALRC Report 45

• A new form of voluntary administration for companies in financial difficulty should be established.
• There should be substantial changes to the laws concerning the liability of directors for the debts of a company.
• A debt repayment plan for individuals in financial difficulties should be established.

Implementation

ALRC Report 6

The Bankruptcy Amendment Act 1980 (Cth) amended the Bankruptcy Act 1966 (Cth) to provide that a bankrupt should be automatically discharged from bankruptcy after three years. Although it did not adopt the Commission’s proposal that the discharge for non-business bankrupts be after six months, it did implement the Commission’s proposal that such discharge should be automatic. The Act provided that the Registrar, Official Receiver or trustee could enter an objection to discharge as of right, but that a creditor could only enter an objection with the leave of the Court.

The Bankruptcy Amendment Act 1997 (Cth) expanded the role of the Insolvency and Trustee Service Australia (ITSA) and created a new form of insolvency administration to be known as debt agreements. Although these amendments to the Bankruptcy Act differ in form from the recommendations of ALRC Report 6, the underlying objectives are the same, as the extended role of ITSA provides for a ‘one-stop service’ point where advice, administrative support and information are available to persons in financial difficulty.

The new debt agreement provisions are in Part IX of the Bankruptcy Act 1966 (Cth). Debtors with liabilities not exceeding a set amount may, via the Official Trustee, propose to enter into an arrangement with his or her creditors to pay them certain amounts in full and final satisfaction for their debts. This amendment implements the principles behind ALRC Report 6, as it aims to facilitate cheaper and more expeditious arrangements between a debtor and his or her creditors.

ALRC Report 36

The Magistrates Court (Enforcement of Judgments) Act 1994 (ACT) implemented a number of the recommendations made in the Commission’s report. The Act empowered the court to order that a judgment debt be paid by: an installment order; a garnishee order attaching earnings; a garnishee order attaching a debt other than earnings; a writ of execution; or an examination summons. It provided detailed provisions as to how these options are to operate in practice.

The Insolvency (Tax Priorities) Legislation Amendment Act 1993 (Cth) abolished the existing priority of the Commissioner of Taxation for tax debts in relation to certain unremitted amounts. The Act provided that debts due to the Commissioner arising as a result of the failure to remit amounts deducted would be treated in a similar manner to debts payable to other unsecured creditors.

Though it was recommended by ALRC Report 36 that the States and Territories enact uniform legislation with regards to debt recovery, little has been implemented besides the ACT legislation. Moreover, the federal parliament has not yet proposed legislation to govern all jurisdictions with regards to this matter.

ALRC Report 45

The Corporate Law Reform Act 1992 (Cth) implemented most of the Commission’s recommendations on corporate insolvency. Part IV of the Act implemented the recommendations relating to voluntary administration. It also reformed the winding up process and adopted the recommendations of the Commission on directors’ liabilities. Other features of the Act include the provisions that are designed to ensure a more equitable division of assets among unsecured creditors.

The Insolvency (Tax Priorities) Legislation Amendment Act 1993 (Cth) amended the Income Tax Assessment Act 1936 (Cth), the Bankruptcy Act 1966 (Cth) and the Corporations Law. It abolished the statutory priority of the Tax Commissioner over other creditors in bankruptcy and insolvency in relation to unremitted tax.

In December 1996, the Bankruptcy Amendment Act 1997 (Cth) commenced and implemented some of the Commission’s recommendations on reform of bankruptcy law. Before legislation was drafted, the Minister of Justice released three discussion papers in 1993, in which the Government addressed a response to a number of the recommendations made in relation to bankruptcy, however some of the most important recommendations made by the ALRC were not addressed.

Continuing issues

Australian society has overwhelmingly moved from a debit society to a credit society and as such the rate of personal and business insolvency has increased dramatically since the release of the General Insolvency Inquiry report in 1988. This trend is set to continue and, as such, amendments to the Bankruptcy Act and related legislation are ongoing as bankruptcy touches on many areas of law.

For further information on reforms to the Bankruptcy Act 1966, contact the Insolvency and Trustee Service Australia.