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Amendments

Bankruptcy Legislation Amendment (Anti-Avoidance and Other Measures) Bill 2004

On 14 May 2004 the Attorney-General Philip Ruddock announced the release of an exposure draft of the Bankruptcy Legislation Amendment (Anti-Avoidance and Other Measures) Bill 2004. A readers guide (Explanatory Memorandum) has also been made available.

The Attorney-General said that "Under these changes, the trustee in bankruptcy will be able to recover assets held in the name of the bankrupt's spouse, or that of another party, where the bankrupt has paid for and uses the asset. These changes will mean that high income earners who become bankrupt won't be able to rely on financial arrangements designed to shield assets from creditors".

Other changes include clarifying the rights of the parties when family law and bankruptcy issues need to be resolved and giving the bankruptcy trustee stronger powers to collect income contributions during bankruptcy.

"The bankruptcy trustee is also given enhanced powers to apply to set aside transfers of property under family law financial agreements where those transfers put that property beyond the reach of creditors", Mr Ruddock said.

These changes are based on the recommendations of the Joint Taskforce Report on the Use of Bankruptcy and Family Law Schemes to Avoid Payment of Tax- an inter-agency report proposing changes to bankruptcy, family and tax laws to crack down on high income tax avoiders.

As the Government is keen to ensure that there is an opportunity for Parliamentary and public scrutiny of the reform proposals, the draft legislation has been referred to the House of Representatives Standing Committee on Legal and Constitutional Affairs.

Bankruptcy Legislation Amendment Bill 2004

On the 24 March 2004 the Attorney-General introduced the Bankruptcy Legislation Amendment Bill 2004 which primarily contains amendments to Part X following the 2003 review. These amendments reflect the announcements made by the Attorney-General in October 2003 although some of these proposals will be affected by regulations that will be implemented once the Bill is passed. In addition to the part X amendments this Bill includes a number of other amendments relating to section 73 compositions and schemes or arrangements; the ability to make regulations prescribing performance standards that will apply to registered trustees and solicitors acting as controlling trustees; correction of drafting error in the transitional provisions contained in the BLAA 2002.

Bankruptcy Legislation Amendment Bill 2004 Explanatory Memorandum

The Bankruptcy (Estate Charges) Amendment Bill 2004 contains consequential amendments necessary as a result of the abolition of the three types of part X agreements and the introduction of Personal Insolvency Agreements.

Bankruptcy Estate Charges Amendment Bill 2004 Explanatory Memorandum

Bankruptcy Legislation Amendment Bill 2004 - Summary
Amendments to Part X
Amendments relating to compositions and schemes or arrangement
Amendments relating to performance standards
Amendments relating to voting documents
Other Amendments

Amendments to Part X
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The proposed changes will enhance the integrity of the Part X process but will not affect the fundamental policy underpinning Part X of providing a simple and flexible process for debtors and creditors to come to an agreement without bankruptcy.

To introduce greater simplicity and flexibility to the Part X process, it is proposed to provide for a single type of generic Part X agreement which would, by agreement between the debtor and creditors, incorporate elements of the 3 types currently found in Part X. These arrangements will be known as 'personal insolvency agreements' instead of 'Part X arrangements' as that term fails to describe what these arrangements are actually about.

There will be standard provisions which would need to be elected by creditors. Those standard provisions will include the following matters:
· identify the property to be dealt with, and whether this includes 'after-acquired' property, and specify how that property is to be dealt with;
· identify the debtor's income that is to be included in the agreement and specify how this is to be dealt with;
· specify the conditions (if any) for the agreement to come into operation;
· specify the circumstances in which, or the events on which, the agreement terminates;
· specify the order in which the debtor's property and/or income is to be distributed among creditors;
· specify whether the antecedent transaction provisions would be available to recover any assets disposed of to third parties prior to the agreement; and
· specify whether the debtor is to be released from provable debts (fully or partially).
· whether the agreement can be terminated by the trustee and if so, when this may occur.

If accepted by a special resolution, the agreement would require execution of a deed. However, on a trustee's determination that the debtor is in material breach of the agreement, termination of the agreement is proposed to be by passage of an ordinary resolution.

Proposed simplification measures will also relate to the meeting procedures. These will be included in Regulations to be introduced once the Bill is passed. For example, the controlling trustee or delegate will automatically be the president of any meeting of creditors and will be able to adjourn the meeting to enable further investigations, if required, subject to a special resolution by creditors who oppose that proposal.

The current judicial review of the deeds or composition is proposed to be simplified. For example, it is proposed to replace the current review with a simple and consistent method of terminating or avoiding the Part X agreement which will extend to a power to make restitution.
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Changes proposed to enhance the integrity of the Part X process will include increased disclosure requirements in relation to the information provided to debtors and creditors. For example, prescribed information will be provided to debtors contemplating a Part X proposal and to creditors about their rights and the creditors' meeting must be advertised. It is proposed that debtors and creditors will be required to disclose their relationship and creditors will be required to disclose any collateral agreements regarding voting.

Other proposed increased disclosure requirements will affect controlling trustees and trustees. For example, there will be a declaration of interests by controlling trustees and trustees will be required to provide details for their remuneration to creditors prior to the meeting and creditors will be entitled to obtain from controlling trustees and trustees, copies of records of receipts and disbursements in a Part X matter.
The Statement of Affairs will be made available to the controlling trustee before the execution of the authority and the controlling trustee will need to file the executed Statement with ITSA for creditors' access.

The Statement of Affairs use in Bankruptcy, Part IX (debt agreements) and Part X (personal insolvency agreements) will be modified to include a requirement for the debtor to identify any creditors who are related entities of the debtor.

Other changes proposed to enhance the integrity of the Part X process will affect the following broad areas:
· Enhancing the effectiveness of the Part X administrators—For example, investigatory and recovery powers will be provided to controlling trustees and trustees; and the Courts will be empowered to vary agreements to remedy defects which act to prevent achievement of the parties' intentions.
· Changes to streamline the Part X process—For example, a creditor's petition will be automatically stayed by a debtor's initiation of the Part X process, time periods will be measured in working days; and termination of a Part X agreement will be an act of bankruptcy.

Amendments relating to compositions and schemes of arrangement

Many of the issues of concern in relation to Part X can also arise in relation to compositions and schemes of arrangement under section 73 of the Act (these are arrangements with creditors post-bankruptcy which lead to the annulment of the bankruptcy if accepted by creditors). Therefore, similar amendments are proposed in relation to section 73 schemes and compositions. As such an arrangement must, by definition, have been preceded by bankruptcy, a trustee will have been appointed and could be expected to have undertaken some investigation prior to a proposal being put to creditors. Therefore, it is not necessary to incorporate all the Part X amendments in relation to section 73 schemes and compositions. The key changes are:

· the trustee will be required to give a copy of the bankrupt's proposal to the Official Receiver within 2 days of receiving it – this will facilitate ITSA's Bankruptcy Regulation branch considering whether to attend the creditors' meeting
· the proposed trustee of the scheme or composition must make a written declaration of relationships with the bankrupt
· the streamlined provisions for setting aside or terminating a personal insolvency agreement under Part X will apply to section 73 schemes and compositions
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Amendments relating to performance standards

It is proposed that a regulation making power will be introduced to provide standards of performance to satisfy the legislative obligations of practitioners. There will also be an amendment to section 155H to include failure to comply with these standards as matter to be considered by the Inspector-General in determining whether a trustee should be asked to show cause why they should not be deregistered as a trustee. These standards will be based on the Personal Insolvency National Standards (PINS) currently in place and will be developed in consultation with the Insolvency Practitioners Association of Australia.

Amendments relating to voting documents

The Bill proposes to amend section 263C of the Act to extend the offence created by that section to making a false statement on any voting documentation (including the proxy form). This change was prompted by the review of Part X but it is appropriate to apply it to all voting documentation used under the Act including that used in bankruptcies and debt agreements.

Other amendments

The Bill proposes some further amendments which are of minor or technical nature. In summary these amendments will:

· facilitate delivery of notices of meetings by email (or in any other manner specified in the regulations which provides the flexibility to take advantage of new technology) – section 64A;
· correct an anomaly in subparagraph 41(3)(c)(i) to ensure that a bankruptcy notice cannot be based on a State or Territory Court judgment more than 6 years old;
· remove redundant words in the definition of 'dependant' in paragraph 139W(2)(c) for income contributions purposes; and
· allow the Registrar to issue a warrant for the arrest of a bankrupt who fails to attend before the Official Receiver or other authorized person – subsection 267E(2).

Finally, the Bill proposes to correct a drafting error in the transitional provisions contained in the Bankruptcy Legislation Amendment Act 2002 to clarify that the commencing date and commencing time for the purposes of that Act is 5 May 2003. ITSA and trustees have been operating on the basis that the amendments were effective on that date. This amendment will ensure this is the case and prevent disadvantage to bankrupts affected by those amendments

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