“Like a bad zombie movie”: Government brings back six-year-old plan to cut bankruptcy terms to one year

A federal government proposal to reduce default bankruptcy terms in Australia from three years to one would effectively render bankruptcy “pointless”, according to one insolvency expert. 

John Winter, chief executive of the Australian Restructuring Insolvency and Turnaround Association, says the plan is “like a bad zombie movie” that continues to be revived, despite first being proposed more than six years ago. 

Shortening the length of bankruptcies was first proposed by the Productivity Commission, and then adopted as part of former prime minister Malcolm Turnbull’s Innovation and Science Agenda back in 2015. 

Legislation to make the change was introduced into Parliament in October 2017, however the Enterprise Incentives Bill lapsed without being passed prior to the 2019 federal election. 

Having introduced temporary bankruptcy and insolvency protections for small businesses during the pandemic, the government has since been consulting on revisiting this change to bankruptcy terms since early 2021, and is now seeking public submissions in relation to an options paper until the end of this month. 

When the change was proposed over six years ago, the government argued the reform would strike “a better balance between encouraging entrepreneurship and protecting creditors”. 

In the new options paper, the government says the proposal “remains fit for purpose”, however, a number of exemptions could also be introduced to address stakeholder concerns. 

These could include excluding bankrupts who, in the preceding 10 years, have been bankrupt or banned as a director; had a bankruptcy extended through an objection to discharge; or have been convicted of certain offences. 

In those situations, the individual would have a bankruptcy length of three years. 

At the same time, the government is also proposing to further promote the use of debt agreements, by extending the default term limit to five years and increasing the eligibility thresholds. 

Taken together, Winter says these proposals, if adopted in full, would have the effect of many more company directors making use of debt agreements, which would mean “bankruptcy would effectively disappear as an option”. 

While Winter says debt agreements are effective tools for consumer credit debts, he questions whether they are appropriate for company directors. 

“It could lead to the situation, which I don’t think the community would accept, where a high-profile bankrupt is potentially able to get themselves out of paying a proper debt to society and be held to account,” he says. 

The use of debt agreements makes sense when an individual has a credit card debt or small personal loan, says Winter, but it is a different story when a company director is responsible for “half a billion dollars in company debt that they have personal assets tied to”.

Winter is concerned that 12 months is not long enough for bankruptcy trustees to properly investigate the full extent of a bankrupt’s business dealings, as in many cases, attempts are made to “hide assets” or the required paperwork is not submitted on time. 

“A year evaporates quickly and then the investigations won’t be completed,” he says. 

There is also a more “holistic question” about the timing and motivation of the current push to reduce bankruptcy terms, says Winter, given the upcoming federal election, the lack of formal policy direction from the government on the matter, and other related reforms, such as the changes to responsible lending rules. 

“Is there a general push to simply make it easier to go broke and get back out there?” he asks. 

“If so, there should be a policy statement up front as it has really big consequences for creditors.”

Rather than reducing the default bankruptcy term, Winter believes it would be more appropriate to change the discharge provisions so that bankruptcy trustees are able to recommend an early discharge for someone who has made honest mistakes and got “caught in a bad spot”. 

“They could be out in a year and that would be a good outcome,” he says. 

As part of the consultation, the government is also considering measures to target untrustworthy advisors, including by collecting more information about pre-insolvency advisors from bankrupts and making it an offence to conceal a bankrupt’s property with the intention to defraud creditors, or to make false statements or declarations. 

More information about the consultation process is available here.