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2016-2017-2018
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
BANKRUPTCY AMENDMENT (DEBT AGREEMENT REFORM) BILL 2018
SUPPLEMENTARY EXPLANATORY MEMORANDUM
Amendments to be Moved on Behalf of the Government
(Circulated by authority of the Attorney-General, the Hon Christian Porter MP)
AMENDMENTS TO THE BANKRUPTCY AMENDMENT (DEBT AGREEMENT
REFORM) BILL 2018
(Government)
GENERAL OUTLINE
1. This Bill amends the Bankruptcy Act 1966.
2. The amendments proposed to be moved by the Government to the Bill:
address queries raised by the Scrutiny of Bills Committee in their Scrutiny Digest
No.3 of 2018
implement recommendations made by the Legal and Constitutional Affairs
Committee in their report on the Bill, and
make minor and technical amendments.
3. The amendments will:
give debtors flexibility to vary their debt agreement to up to five years if they
suffer a substantial and unforeseen change in circumstances that is likely to
prevent them from completing the debt agreement
enable debtors who own or have equity in their principal place of residence to
propose a debt agreement length of up to five years, and to exempt these debtors
from the requirement to comply with the payment to income ratio
give additional functionality to the payment to income ratio formula so that it can
better target low income debtors
provide an option for debtors to propose payments that exceed the payment to
income ratio percentage if the source of the debtor's proposed payments is viable
amend the description and characteristics of offences in the Bill and the
Bankruptcy Act to ensure they are consistent with standards in the Criminal Code
Act 1995 and the Guide to Framing Commonwealth Offences, Infringement
Notices and Enforcement Powers
extend the commencement time for most of the Bill's provisions from six to nine
months after Royal Assent
expressly prohibit a debtor from self-administering their own debt agreement, and
correct a defect in the Bankruptcy Act.
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FINANCIAL IMPACT
4. The amendments to the Bill will have no direct financial impact.
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GLOSSARY
5. The following abbreviations are used throughout this explanatory memorandum.
Abbreviation Definition
AFSA Australian Financial Security Authority
Amending Act Bankruptcy Amendment (Debt Agreement
Reform) Act 2018
Bankruptcy Act Bankruptcy Act 1966
Bill Bankruptcy Amendment (Debt Agreement
Reform) Bill 2018
Amendment to the Bill Government amendment to the Bankruptcy
Amendment (Debt Agreement Reform) Bill
2018
Legal and Constitutional Affairs Committee Senate Standing Committee on Legal and
Constitutional Affairs
Scrutiny of Bills Committee Senate Standing Committee on the Scrutiny
of Bills
6. Unless otherwise stated, any reference in this supplementary explanatory
memorandum to a clause is a reference to a clause in the Government Amendments to the
Bill.
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STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Bankruptcy Amendment (Debt Agreement Reform) Bill 2018
7. The amendments to the Bill are compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the Human
Rights (Parliamentary Scrutiny) Act 2011.
Overview of the Bill
8. The amendments to the Bill will:
give debtors flexibility to vary their debt agreement to up to five years if they
suffer a substantial and unforeseen change in circumstances that is likely to
prevent them from completing the debt agreement
enable debtors who own or have equity in their principal place of residence to
propose a debt agreement length of up to five years, and to exempt these debtors
from the requirement to comply with the payment to income ratio
give additional functionality to the payment to income ratio formula so that it can
better target low income debtors
provide an option for debtors to propose payments that exceed the payment to
income ratio percentage if the source of the debtor's proposed payments is viable
amend the description and characteristics of offences in the Bill and the
Bankruptcy Act to ensure they are consistent with standards in the Criminal Code
Act 1995 and the Guide to Framing Commonwealth Offences, Infringement
Notices and Enforcement Powers
extend the commencement time for most of the Bill's provisions from six to nine
months after Royal Assent
expressly prohibit a debtor from self-administering their own debt agreement, and
correct a defect in the Bankruptcy Act.
Human rights implications
The right to a fair trial
9. This Bill engages the right to a fair trial in Article 14 of the International Covenant on
Civil and Political Rights.
10. The right to a fair trial applies to criminal proceedings. The Parliamentary Joint
Committee on Human Rights Guidance Note 2 notes a range of protections are afforded to
persons accused and convicted of criminal offences under article 14, including the
presumption of innocence (article 14(2)).
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11. Article 14(2) provides that everyone charged with a criminal offence shall have the
right to be presumed innocent until proven guilty according to law.
12. Strict liability offences engage the presumption of innocence, because they allow for
the imposition of criminal liability without the need to prove fault. The effect of applying
strict liability to an element or elements of an offence therefore means that the prosecution
does not need to prove fault. The Parliamentary Joint Committee on Human Rights
Guidance Note 2 notes that where strict liability offences are introduced, a human rights
assessment should assess its compatibility with the presumption of innocence.
13. Clause 8 of the Government amendments to the Bill inserts a new strict liability
offence provision of 60 penalty units for a proposed administrator that does not undertake
reasonable inquiries into the debtor's financial situation when required to do so. The Bill
requires debt agreement proposals to comply with a payment to income ratio to ensure that
debtors do not rely on speculative or uncertain non-income measures to make payments
under their debt agreement. Where a debtor proposes a source of payments that is ultimately
not available, the debtor can undergo substantial hardship in making payments under their
debt agreement.
14. The amendment introduces an option for debtors to propose payment schedules that
would exceed the payment to income ratio percentage if the proposed administrator, among
other things, undertakes reasonable inquiries into the debtor's financial situation to ensure
that the debt agreement is sustainable. Preventing the abuse of this amendment is of critical
importance to the debt agreement system's debtor-protection safeguards.
15. Accordingly, if a proposed administrator fails to carry out the required inquiries into
the debtor's financial situation, a strict liability offence of 60 penalty units applies, with a
corresponding infringement notice of 12 penalty units. Applying strict liability to this
offence is appropriate as it is necessary to strongly deter misconduct that can have serious
consequences for vulnerable debtors. Strict liability offences also reduce non-compliance,
which bolsters the integrity of the regulatory regime enforced by AFSA.
16. In addition, the Bill provides that only a registered debt agreement administrator,
registered trustee or the Official Trustee can be authorised to administer a debt agreement.
Accordingly, the strict liability offence applies to registered professionals that are already
required to satisfy a high standard of knowledge, character and professionalism. Noting the
high standard that administrators must satisfy, it is appropriate to remove the requirement for
prosecution to prove fault.
17. Finally, the application of strict liability, as opposed to absolute liability, preserves the
defence of honest and reasonable mistake of fact. This defence maintains adequate checks
and balances for individuals who may be accused of breaching this offence.
Conclusion
18. The new strict liability offence is compatible with human rights. To the extent that
this measure may limit the presumption of innocence, the limitation is reasonable, necessary
and proportionate to protecting vulnerable debtors.
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NOTES ON AMENDMENTS
Commencement (Clauses 1 and 4)
20. Clause 1 of the amendments prolongs the commencement time of most of the Bill's
provisions from six to nine months beginning on the day the Amending Act receives the
Royal Assent.
21. The size and complexity of the amendments to Bill will require additional time for the
regulatory system and affected stakeholders to adapt. For example, AFSA, which
encompasses the Inspector-General in Bankruptcy, Official Receiver and Official Trustee,
will need to update its processes, guidelines and information technology systems.
Stakeholders such as debt agreement administrators, creditors and financial counsellors may
also require additional time to modify their systems and processes.
22. Clause 1 does not amend item 3 of the commencement table, meaning that the
Bankruptcy Act's provisions dealing with unregistered debt agreement administrators will
continue to commence 12 months beginning on the day the amending Act receives the Royal
Assent.
23. Clause 4 shortens, from six to three months, the time from commencement that an
unregistered administrator will be replaced by the Official Trustee. Item 5 of Part 1 Schedule
1 of the Bill is the transitional provision providing for the unregistered administrator's
replacement, and is currently set at six months after commencement of the item. By
extending commencement of the item from six to nine months, shortening the transitional
provision from six to three months maintains the 12 months' notice of replacement given to
unregistered administrators.
Penalty (Clauses 17, 27, and 32) and Inducements (Clauses 2, 16, 26, 31, and 36)
24. These amendments address queries raised by the Scrutiny of Bills Committee in their
Scrutiny Digest No.3 of 2018 and further considered in their Scrutiny Digest No.5 of 2018.
25. Item 41 of Part 6, Schedule 1, item 12 of Part 2 Schedule 2 and item 16 of Part 3
Schedule 2 of the Bill create new offences for a proposed administrator or administrator that
gives, or agrees or offers to give an inducement to an affected creditor to influence their vote
on a debt agreement proposal, variation or termination. The penalty for these offences is
3 months' imprisonment.
26. The Guide to Framing Commonwealth Offences (the Guide), however, notes that
3 months' imprisonment terms may be inappropriate because offences deserving of
imprisonment should be of a level of severity such that at least 6 months' imprisonment is
suitable.
27. The purpose of the relevant offences in the Bill (item 41 of Part 6, Schedule 1, item
12 of Part 2 Schedule 2, and item 16 of Part 3 Schedule 2 of the Bill) is to prevent
commercial misconduct which could advantage some parties at the expense of other parties.
The parties that could benefit are the administrator and certain creditors, while the other
creditors are disadvantaged.
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28. For example, suppose that a debtor owes three creditors $10,000 each. After
accounting for the administrator's average remuneration percentage and the realisations
charge, suppose that the debtor can only devote $15,000 in total to pay creditors under a debt
agreement. Pursuant to paragraph 185C(2)(d)(i) of the Bankruptcy Act, the debt agreement
proposal would need to propose equal proportional payments to each creditor (i.e. $5,000 per
creditor). Suppose that the proposed administrator instead charges the debtor a higher
remuneration percentage that equates to an additional $3,000, and uses the additional
moneys to induce one of the creditors to approve the agreement. After subtracting the
additional $3,000, the debtor now has only $12,000 to pay creditors under the agreement. In
this instance, the three creditors would each receive $4,000 under the agreement, with one
creditor receiving a further $3,000 amount in inducements. Therefore, rather than each of the
three creditors being paid in equal proportion and receiving $5,000 each; one creditor would
now receive $7,000 ($4,000 under the agreement plus $3,000 in inducements) while the
other two creditors would receive $4,000 each. Accordingly, due to the administrator's
misconduct, one creditor unfairly benefits at the expense of the other two creditors.
29. By maintaining the penalty of imprisonment for the three offences, and increasing the
terms of imprisonment to six months, the three offence provisions achieve alignment with
the consequence of imprisonment applying to similar Commonwealth offences. For example,
subsection 45AF(4) of Schedule 1 of the Competition and Consumer Act 2010 provides a
penalty of 2,000 penalty units or 10 years' imprisonment applying to a person that makes a
contract containing a cartel provision (including price-fixing and bid-rigging). The nature of
cartel behaviour is similar to the three abovementioned offences in the Bill, because the
behaviour concerned is commercial misconduct that could advantage some parties at the
expense of other parties.
30. In consideration of the appropriateness of imprisonment consequences for this type of
behaviour, and accounting for the Guide's analysis of the appropriate minimum length of
imprisonment penalties, clauses 17, 27 and 32 therefore replace the Bill's 3 months'
imprisonment penalties with 6 months' imprisonment. The length of 6 months'
imprisonment is appropriate for these offences, despite the 10 years' imprisonment penalty
for cartel behaviour. While the offences all apply to commercial misconduct that could
advantage some parties at the expense of other parties, a longer term of imprisonment is
appropriate for cartel behaviour because it could have more significant business or economic
consequences.
31. Clauses 16, 26 and 31 also change the description of the fault element of the three
abovementioned offences introduced by the Bill. The offences apply to a proposed
administrator or administrator that gives, or agrees or offers to give an inducement to an
affected creditor with a view to influencing their vote on a debt agreement proposal,
variation or termination. Clauses 16, 26 and 31 change the description of the fault element of
the offence, from "with a view to" to "with the intention of". The updated description is
consistent with the conceptualisation of intent in Division 5 of the Criminal Code Act 1995.
32. The Bill's 3 months' imprisonment penalties were modelled on the strict liability
offence at section 60-21 of Schedule 2 of the Bankruptcy Act, which includes a penalty of
3 months' imprisonment, 50 penalty units or both, for giving inducements to secure a
person's appointment as the trustee of a bankrupt estate. Neither the term of 3 months'
imprisonment, nor the application of strict liability to an offence subject to imprisonment,
are compliant with the Guide.
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33. Similarly to the offences at item 41 of Part 6, Schedule 1, item 12 of Part 2 Schedule
2, and item 16 of Part 3 Schedule 2 of the Bill, the offence for influencing the appointment
of a trustee, under section 60-21 of Schedule 2 of the Bankruptcy Act, could also financially
advantage one creditor at the expense of other creditors.
34. To ensure alignment with the similar offences to be introduced by the Bill, clause 36
therefore amends section 60-21 of Schedule 2 of the Bankruptcy Act to:
update the section's conceptualisation of the offence's fault element from "with a
view to" to "with the intention of"
remove the application of strict liability, and
replace the penalty of 3 months' imprisonment, 50 penalty units or both with a
maximum penalty of 6 months' imprisonment.
35. Clause 2 updates the Bill's commencement table so that the change to section 60-21
of Schedule 2 of the Bankruptcy Act commences 9 months beginning on the day the
amending Act receives the Royal Assent.
Debtor cannot self-administer debt agreement (Clauses 2, 3, 9, 12, 14, 15, 22, 24, 25, 28,
29, 30, 33, and 36)
36. Item 2 of Part 1 Schedule 1 of the Bill adds a note at the end of subsection 185C(2) of
the Bankruptcy Act. The note's intention is to clarify that a debtor who is a registered debt
agreement administrator or registered trustee can be authorised to self-administer their own
debt agreement.
37. However, subsection 186K(2) and paragraph 40-20(1)(b) of the Bankruptcy Act
provide for a registered debt agreement administrator and a registered trustee's
deregistration, respectively, if they become an insolvent under administration.
38. Section 9 of the Corporations Act 2001 (Cth) states that 'insolvent under
administration' includes "a person who is a party (as a debtor) to a debt agreement".
Therefore, if a registered debt agreement administrator or registered trustee proposed to self-
administer their own debt agreement, and if the debt agreement was ultimately made under
section 185H of the Bankruptcy Act, the debtor would immediately become party to a debt
agreement as a debtor under section 185I, and, in turn, be deregistered as an administrator or
trustee.
39. A debt agreement administrator or trustee in this scenario would be replaced by the
Official Trustee, as administrator of their the debt agreement, under subsections 185ZB(2)
and (3) of the Bankruptcy Act, respectively.
40. Enabling a registered debt agreement administrator or registered trustee to propose to
self-administer their agreement, even though they could not ultimately administer their debt
agreement, is an inefficient process for dealing with self-administered debt agreements.
41. Moreover, item 1 of Part 1 Schedule 1 of the Bill provides that only a registered debt
agreement administrator, registered trustee or Official Trustee can be authorised to
administer a debt agreement. By preventing an unregistered administrator from
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administering an agreement, a debtor could not, under any circumstances self-administer
their debt agreement. Accordingly, provisions of the Bill and Bankruptcy Act making
reference to self-administration are either obsolete or unnecessary.
42. Clause 3 amends paragraph 185C(2)(c) to expressly prohibit debtors from being
authorised to self-administer their own debt agreement.
43. Clauses 9, 12, 14, 15, 22, 24, 25, 28, 29, 30 and 33 repeal or amend items of the Bill
or provisions of the Bankruptcy Act that apply to, or implicitly reference, self-administered
debt agreements.
44. Clause 36 repeals subsection 6(1B) of the Bankruptcy (Estate Charges) Act 1997,
which relates to a debtor that self-administers their own debt agreement.
45. Clause 2 updates the Bill's commencement table so that the deletion of subsection
6(1B) of the Bankruptcy (Estate Charges) Act 1997 commences 9 months beginning on the
day the Amending Act receives the Royal Assent.
Payment to income ratio - Modified formula (Clauses 7, 8, and 21)
46. This amendment responds to the Legal and Constitutional Affairs Committee's
recommendation to amend the payment to income ratio to account for the variable
circumstances of a debtor's financial situation.
47. Item 20 of Part 4 Schedule 1 of the Bill inserts new paragraph 185C(4)(e), which
provides that the debtor cannot give the Official Receiver a debt agreement proposal if the
percentage worked out using the payment to income ratio formula (the proposal percentage)
exceeds the percentage prescribed by the Minister under subsection 185C(4B) (the
prescribed percentage). The proposal percentage is unique to each debtor's proposal,
equalling the debtor's total payments under the agreement, divided by the debtor's after-tax
income. Note: the terms proposal percentage and prescribed percentage are not used in the
Bill.
48. The payment to income ratio formula under item 20 of Part 4 Schedule 1 and item 7
of Part 2 Schedule 2 of the Bill does not have the functionality to distinguish between low
and higher income debtors.
49. Clause 7 amends the payment to income ratio formula by adding a fixed amount, the
low income debtor amount, to the numerator of the formula.
50. Clause 8 inserts new paragraph 185C(4B)(b) which empowers the Minister to set the
low income debtor amount, in addition to the Minister's power to determine the prescribed
percentage under new paragraph 185(4B)(a).
51. Enabling the Minister to set the low income debtor amount would ensure that the
payment to income ratio could apply stricter standards for low income debtors. For example,
the amended formula has the functionality to apply a restrictive payment threshold to low
income debtors but leave higher income debtors relatively unrestricted. The Minister could
achieve this distinction by prescribing a low low income debtor amount and a low prescribed
percentage. The amended formula therefore strengthens the ratio's ability to act as a
safeguard for vulnerable debtors and maintains the accessibility of the debt agreement
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system for higher income debtors with a greater capacity to repay their debts. In the absence
of a low income debtor amount, the payment to income ratio cannot achieve this distinction.
52. Clause 21 requires debt agreement variations to comply with the new formula.
Payment to income ratio - Alternative options for debtors to exceed the ratio (Clauses 3,
5, 6, 8, 10, 11, 13, 18, 21, and 34)
Alternative option 1 - administrator satisfied of a viable source of payments
53. Item 20 of Part 4 Schedule 1 of the Bill inserts new paragraph 185C(4)(e), which
provides that the debtor cannot give the Official Receiver a debt agreement proposal if the
proposal percentage, worked out using the formula for the payment to income ratio, exceeds
the prescribed percentage.
54. This amendment responds to consideration of the payment to income ratio by both the
Scrutiny of Bills Committee and the Legal and Constitutional Affairs Committee.
55. In their Scrutiny Digest No.3 of 2018 and Scrutiny Digest No.5 of 2018, the Scrutiny
of Bills Committee noted significant matters, such as eligibility requirements for entering
into a debt agreement, should not be included in delegated legislation without a sound
justification. The Scrutiny of Bills Committee noted including in the Bill a minimum
threshold for the prescribed percentage the Minister may determine could address the risk of
limiting access to the debt agreement system via legislative instrument.
56. The Legal and Constitutional Affairs Committee, on the other hand, recommended the
payment to income ratio be amended to account for the variable circumstances of a debtor's
financial situation.
57. By prohibiting debt agreement proposals where the proposal percentage exceeds the
prescribed percentage, the Bill does give the Minister the power to restrict eligibility via a
legislative instrument. The payment to income ratio is one debtor protection safeguard of the
Bill which is designed to prevent access to the debt agreement system where entering into a
debt agreement would cause the debtor additional financial hardship.
58. Enabling the prescribed percentage to be set by the Minister via legislative instrument
ensures the prescribed percentage retains its flexibility and is fit for purpose. The prescribed
percentage may need to be amended quickly in light of the fluctuating nature of the financial
market, and in consideration of the significant harm that may be experienced by debtors if
the prescribed percentage is or becomes unsuited for market conditions.
59. However, setting a minimum threshold for the prescribed percentage, as suggested by
the Scrutiny of Bills Committee, is problematic, as it may prevent low income debtors who
are below the threshold, but can nevertheless afford to enter into a debt agreement, from
accessing the system as a debt relief option. A low income debtor could complete a debt
agreement, for example, by receiving assistance from a spouse or parents or returning to
ongoing employment.
60. Conversely, low income debtors should be prevented from proposing debt agreements
that are based on acquiring funds that are speculative, or if acquiring the funds could cause
the debtor financial hardship. For example, if the debtor does not have the income to make
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payments under a debt agreement, the debt agreement proposal should not rely on high-
interest loans, proceeds from selling an essential asset or income from improbable future
employment.
61. Therefore, in consideration of the Scrutiny of Bills Committee's concerns, and as an
alternative to the Scrutiny of Bills Committee's suggestion of setting a minimum threshold
for the prescribed percentage, the proposed Government amendments to the Bill introduce
an alternative option which enables a debtor to exceed the payment to income ratio in certain
circumstances. These amendments ensure the payment to income ratio does not restrict
access to the debt agreement system by those debtors who can afford debt agreements.
Moreover, in addition to the proposed Government amendments relating to the modified
payment to income ratio formula (clauses 7, 8 and 21), these amendments further enable the
application of the payment to income ratio to be considered in light of an individual debtor's
financial situation, thereby responding to the Legal and Constitutional Affairs Committee's
recommendation.
62. Clause 8 inserts new paragraph 185C(4C)(a) which allows the proposal percentage to
exceed the prescribed percentage. To ensure that this option is exercisable only by debtors
who have a feasible and viable source of payments, a proposed debt agreement administrator
would be required to inquire into, and take steps to verify, the debtor's financial situation
under new subsection 185C(4D).
63. Where a debtor's proposal percentage exceeds the prescribed percentage, clause 8
also inserts new paragraph 185C(4C)(b) which requires the proposed administrator to certify
that they are satisfied the debtor is likely to discharge their obligations under the agreement
(i.e. that the proposal is sustainable). The threshold of satisfied is higher than the threshold
of reasonable grounds to believe, which is the threshold that would apply to a proposed
administrator certifying a debt agreement proposal which satisfies the payment to income
ratio (ie where the proposal percentage is less than or equal to the prescribed percentage).
64. Clause 10 amends paragraph 185C(2D)(c) so that, if the proposed administrator is
required to meet the higher certification threshold of satisfied, the proposed administrator is
not also required to certify that they have reasonable grounds to believe that a proposal is
sustainable.
65. Clause 11 inserts new subsection 185C(2DA) to provide that, if the debt agreement
proposal percentage exceeds the prescribed percentage, the proposal lodged with the
Official Receiver must include the separate certificate under new paragraph 185C(4C)(b).
66. The purpose of the Bill's payment to income ratio is to ensure that debtors do not rely
on speculative or uncertain non-income sources of payments to make payments under their
debt agreement. Where a debtor proposes a source of payments that is not ultimately
available, the debtor can undergo substantial hardship in making payments under their debt
agreement.
67. Preventing the abuse of this alternative option, which enables the proposal percentage
to exceed the prescribed percentage, is therefore of critical importance to the debt agreement
system's debtor-protection safeguards. Accordingly, if a proposed administrator fails to carry
out the required inquiries into the debtor's financial situation, a strict liability offence of 60
penalty units applies, with a corresponding infringement notice of 12 penalty units.
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68. Clause 8 also inserts new subsection 185LG(1A) and amends subsection 185LG(2) to,
respectively, ensure the proposed administrator's requirements to undertake reasonable
inquiries, and to correctly certify that the agreement is sustainable, are duties of the
administrator. Breaching these duties could result in the administrator's deregistration.
69. By introducing an alternative option accessible by debtors whose proposal percentage
exceeds the prescribed percentage, this amendment therefore maintains the appropriate
debtor protection safeguards while addressing concerns raised by the Scrutiny of Bills
Committee by ensuring the Minister's power to set the prescribed percentage via legislative
instrument does not prevent access to the debt agreement system by debtors who can afford
to enter into a debt agreement.
Alternative option 2 - option for debtors with property to exceed the ratio
70. Clause 5 amends item 20 of Part 4 Schedule 1 of the Bill to provide that a person who
has an interest in their principal place of residence is exempt from complying with the
payment to income ratio. Clause 18 inserts new subsection 185C(2AB), which details the
types of property interests in a principal place of residence that would permit a debtor to
exceed the payment to income ratio.
71. The exemption introduced by clause 5 is intended to give debtors with a property to
protect a better opportunity to access the debt agreement system. The requirement for a debt
agreement to comply with the payment to income ratio is a debtor-protection safeguard
aimed at preventing debtors from committing to a debt agreement that relies on a speculative
or uncertain source of payments. However, if complying with the payment to income ratio
has the effect of preventing some debtors from offering creditors an acceptable debt
agreement proposal, the debtor could suffer a more harmful outcome if they lose their
principal place of residence in a subsequent bankruptcy.
72. The Bankruptcy Act already contains a safeguard to prevent debtors from proposing
an unsustainable debt agreement. Where a debtor with a property to protect is exempt from
complying with the payment to income ratio, the proposed administrator would still be
required to certify that the payments under the agreement are sustainable under paragraph
185C(2D)(c) of the Bankruptcy Act.
73. Clause 21 inserts paragraphs 185M(1E)(a) and (b) which provide that if the debtor
was not required to comply with the payment to income ratio at the proposal stage, the
debtor is also not required to comply with the ratio on a variation proposal.
Length of debt agreements - Five year option for debtors with property (Clause 18)
74. Part 1 Schedule 2 of the Bill inserts new subsections 185C(2AA) and 185M(1D),
which restrict debt agreement proposal and variation proposal lengths, respectively, to three
years beginning on the day the agreement is made.
75. This amendment has been developed in response to the Legal and Constitutional
Affairs Committee's consideration of the Bill's introduction of the three year limitation to
the length of debt agreement proposals. The Committee, and public submissions to the
Committee's inquiry, raised concerns that the shortened debt agreement timeframe may
reduce the total amount of repayments the debtor can offer their unsecured creditors, which
could result in some debtors being unable to offer creditors an acceptable amount.
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76. Restricting debt agreement proposal and variation proposal lengths to three years is a
debtor-protection safeguard aimed at preventing debtors from undergoing the harm posed by
a long and possibly unsustainable debt agreement. However, if the three year timeframe has
the effect of preventing some debtors from offering creditors an acceptable debt agreement
proposal, the debtor could suffer a more harmful outcome if they lose their principal place of
residence in a subsequent bankruptcy.
77. Alternatively, where a debtor has a property to protect, creditors may expect the
debtor to propose a higher repayment percentage than other debtors. Accordingly, debtors
may be placed on prolonged hardship arrangements or be persuaded to sell their property to
enable them to pay their creditors in full.
78. Clause 18 inserts new paragraphs 185C(2AA)(b) and 185MC(1D)(b), which allow
eligible debtors to propose or vary a debt agreement to a timeframe of up to five years from
the day the agreement was made. A debtor is eligible to undertake a five year debt agreement
if, at the proposal time, they have an interest in their principal place of residence that falls
within the definition included in new subsection 185C(2AB) (also inserted by clause 18).
The definition under new subsection 185C(2AB) is intended to cover most types of interests
in property that would make the debtor vulnerable to losing their home under bankruptcy.
79. In defining the types of property interests to which new paragraph 185C(2AA)(b)
applies, clause 18 also inserts new subsection 185C(2AD), which empowers the Minister to
determine the definitional boundaries of the types of property interests that would permit a
debtor to propose, or vary, a debt agreement to up to five years.
80. Clause 18 also inserts new subsection 185C(2AC) which ensures that debtors
exercising the option to propose a debt agreement longer than three years, must not
undertake to sell their principal place of residence on the debt agreement proposal. This
amendment ensures that debtors can only propose a debt agreement longer than three years if
they intend to keep their home.
Length of debt agreements - Flexibility to vary debt agreements to 5 years (Clauses 18-
20, and 23)
81. This amendment responds to the Legal and Constitutional Affairs Committee's
recommendation to amend the Bill to allow for debt agreements entered into under a three
year timeframe to be capable of being extend by up to an additional two years by agreement
of the debtor and creditors.
82. Item 7 of Part 2 Schedule 2 of the Bill prevents a debtor from varying their debt
agreement to extend the timeframe to longer than three years beginning on the day the
agreement was made. For debtors whose personal or financial circumstances adversely
change during the agreement, this limitation could result in the debt agreement's termination.
83. However, providing all debtors with the option to prolong a debt agreement through a
variation could discourage a debtor and its proposed administrator from exercising financial
prudence at the debt agreement proposal stage. For example, a debtor may commit to a
payment schedule that is likely to be unaffordable, knowing that he or she can simply
prolong the agreement if they cannot maintain the payments.
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84. Clause 18 therefore inserts new paragraph 185M(1DB)(a), which enables certain
debtors in a debt agreement to propose a variation extending the timeframe of the agreement
to up to five years. The debtor is eligible for this option if they suffer a substantial change in
circumstances after the agreement was made that was not foreseen at the time the agreement
was made. The unforeseen change in circumstances would need to be responsible for the
debtor being unlikely to discharge the obligations created by the agreement.
85. Clause 18 also inserts new paragraph 185M(1DB)(b) which prohibits a variation to
beyond three years, on the basis of the abovementioned conditions, from proposing to
increase the total payments under the agreement. This prohibition would ensure that the
flexibility to vary an agreement to longer than three years cannot be a mechanism for a
debtor to pay more under their agreement.
86. New paragraph 185M(1DB)(a), inserted by clause 18, requires the debtor's
administrator to certify that they have reasonable grounds to believe that the debtor satisfies
the conditions varying their debt agreement to beyond three years.
87. Clause 19 amends subsection 185LA(3) of the Bankruptcy Act so that the
administrator has a duty to correctly certify that the debtor satisfies the conditions for
varying their debt agreement to beyond three years. Breaching this duty could result in the
administrator's deregistration.
88. Clause 23 inserts new paragraph 185M(2A)(b), which enables the Official Receiver to
refuse a variation proposal for processing if they think the creditors' interests would be better
served by not accepting the proposal for processing. This power would not enable the
Official Receiver to question the veracity of the administrator's certification. However, it
would allow the Official Receiver to reject a variation proposal if the debtor has provided
insufficient or incomplete information to support the grounds for extension. The Official
Receiver's power to reject the proposal is designed to protect creditors from voting on
variation proposals when they only have access to incomplete or insufficient information.
89. If the Official Receiver were to refuse a variation proposal on the ground under new
paragraph 185M(2A)(b), the debtor or an affected creditor could appeal the Official
Receiver's decision to the Administrative Appeals Tribunal under new subsection
185M(2C), inserted by item 9 of Part 2 Schedule 2 of the Bill.
Technical amendment (Clause 35)
90. Subsection 186A(2) of the Bankruptcy Act makes reference to subparagraph
186A(1)(a)(i) of the Bankruptcy Act, which does not exist.
91. Subsection 186A(2) of the Bankruptcy Act is intended to exempt a person whose
bankruptcy was annulled under section 153B of the Bankruptcy Act from satisfying the basic
eligibility test. In the absence of this exemption, a person whose bankruptcy was annulled
could not qualify for debt agreement administrator registration, because they would fail the
basic eligibility test due to being an insolvent under administration under paragraph
186A(1)(a).
92. Clause 35 therefore amends subsection 186A(2) so that it correctly refers to paragraph
186A(1)(a), as is intended.
15
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