Turnbull Government Proposes Shortening Minimum Bankruptcy Period
Thursday 14 January 2016 @ 11.15 a.m. | Legal Research | Trade & Commerce
The Turnbull Government has signalled its plans to relax bankruptcy laws by reducing the minimum period of personal bankruptcy from three years to one year, as well as providing a safe harbour mechanism to protect directors from liability for insolvent trading, provided they engage restructuring advisers and pursue a turnaround plan. The proposals were outlined in the Prime Minister’s innovation statement, but are not expected to be introduced to the legislative process in 2017, following industry consultations.
The proposals go beyond the changes in the Insolvency Law Reform Bill 2015, which is currently being considered in the House of Representatives. As the second reading speech notes, the Bill focuses on “restor[ing] confidence in the insolvency profession by raising the standards of professionalism and competence of practitioners, and identifying and removing ‘bad apples’ from the profession more swiftly”. For more information on the current bill, see TimeBase’s earlier article.
Reaction to the Proposal
Reaction to the proposal has been mixed, with several people warning that the changes in the legislation may benefit people taking advantage of the system. The chief executive of the Australian Restructuring, Insolvency and Turnaround Association, John Winter, told the Sydney Morning Herald that he supported the laws, which were aimed at the “good guys”, but acknowledged there was a risk involved:
“There's some famous people who have cycled in and out of bankruptcy over their lives. There's a whole bunch of other people who are out there trying to build a business and it didn't quite work and yet they get very heavily penalised and they can't restart… Addressing people who are trying to rort the system is another set of regime change.”
Venture capitalist Bill Ferris was enthusiastic about the changes, telling the Australian Financial Review that the current laws deterred investors from start-ups:
“They naturally find it very intimidating themselves personally and [with] their assets at risk in a risky early-stage deal, but with their own money in the deal and a lightened-up provision I think we'd probably see more willingness. It could be more important than the money…
There is a grey line but what has to try to be achieved is that you also don't snuff out experience and you don't bash people simply because they have had an honest failure in a large or small start-up venture that has not worked.”
In an article on The Conversation, Associate Professor Jason Harris and Visiting Fellow Michael Murray of the University of Technology argued that the reforms were necessary, and that the stigma against bankruptcy should also be addressed:
“Australia is seen internationally as having a rather harsh view of unpaid debt. But punishment and deterrence can only achieve so much when it comes to discouraging reckless borrowing or profligate spending.
A person might well not pursue their innovative business idea if the consequence of it not working were jail, or at a less extreme outcome, a long period of bankruptcy and the loss of most if not all of their property. Creditors also need a predictable, transparent and fair system for collecting their debts.”
Insolvency specialist Stirling Horne told the Sydney Morning Herald he wasn’t sure the reforms would have a significant impact:
“I would have thought whether you go bankrupt for one year or three years doesn't make a hell of a difference. Once you go bankrupt the credit-rating people will have you on their radar and they only have to take it off five years after you've been discharged from bankruptcy so that's not going to be of a great help to a person who wants to come back and restore themselves to a way of life or start a new business.”
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