Innovation through insolvency law reform: Bankruptcy period to be reduced from three years to one year.

Given that start-ups and entrepreneurs are a large contributor to new jobs and innovation in Australia, the Federal Government has taken several initiatives to foster a culture where innovation and entrepreneurship is encouraged. One of these initiatives is improved insolvency laws.

As part of the National Innovation and Science Agenda, the Bankruptcy Amendment (Enterprise Incentives) Bill 2017 (“the Bill”) was introduced and passed by both the House of Representatives and the Senate. The Bill, which reduces the current default bankruptcy period from three years to one year, is expected to commence in the first half of 2018.

As a result of the Bill, the following restrictions (amongst others) prescribed by the Bankruptcy Act 1966 will also reduce from three years to one year, so that upon discharge, a former bankrupt may:

  • Travel overseas without written permission from their trustee in bankruptcy.
  • Apply for credit over the prescribed amount without disclosing their bankruptcy status.
  • Become a director of a company.

It is also important to note that the following obligations (among others) will no longer only apply during the default bankruptcy period but will continue for a ‘prescribed period’ (defined in the Bill as the longer of the period of bankruptcy, the period of three years from the date on which the bankrupt files their statement of affairs, or the period for which the bankrupt is or remains liable to make any payments under the Bill). During the prescribed period, the bankrupt is still required to:

  • Discloseto the trustee information about their propertydispositions of propertyconduct and examinable affairs.
  • Keep and retain books that record the bankrupt’s income, transactions and other financial affairs.

It is also important to note that the Bill will preserve a Trustee’s capacity to object to a bankrupt’s automatic discharge to extend the default period of bankruptcy in cases where the bankrupt does not fulfil their obligations.

For example, currently a bankrupt is obligated to pay income contributions to their estate if their income exceeds the applicable threshold. The Bill will preserve a bankrupt’s obligation to fulfil their income contribution liability prior to their discharge. To prevent high-income earners from using bankruptcy as a means of avoiding their debts, the Bill includes measures that increase the period in which a discharged bankrupt must fulfil their income contribution liability. Under the Bill, a discharged bankrupt will be required to comply with their income contribution obligations for a minimum period of two years following their discharge (i.e. which is currently the situation) or, in the event where the bankruptcy has been extended due to non-compliance by the bankrupt, for five to eight years.

Australia’s insolvency laws must align the competing interests of the predominant stakeholders in a bankruptcy:  the debtor, the creditors, the Trustee in Bankruptcy, and the Australian Financial Security Authority (AFSA). Current bankruptcy legislation regarding bankruptcy discharge periods and corresponding restrictions on bankrupts during their period of bankruptcy arguably reflect a scale tipped in favour of the creditors.

Reducing the default bankruptcy period to one year will re-balance the scale in favour of the debtor by encouraging entrepreneurial behaviour and encouraging entrepreneurs to re-engage in business sooner.

It will be interesting to see whether the new one-year bankruptcy Bill will lead to bankruptcies resulting specifically from entrepreneurship risk-taking. We will have to wait and see if the Bill achieves the objectives in the Federal Government’s National Innovation and Science Agenda.